Many companies previously turned to overseas manufacturers because of the low labor costs. However, many firms are now finding that overall costs have increased due to factors like quality control problems from different countries when assembling the various parts in the U.S. and high import costs, among others. Consequently, more are re-shoring operations into the U.S.
Smaller infrastructure companies have benefited from this re-shoring, and with the Trump administration looking to improve the country’s infrastructure, small- and mid-cap companies are seen as a purer U.S. play, Bernstein said.
There is also a trade barrier story as Trump has evinced his displeasure with foreign trade agreements and could renegotiate with trade barriers that would be more favorable to domestic U.S. companies and manufacturers.
Furthermore, Bernstein pointed that rising rates with the yields on 10-year Treasury bonds at 2.12% reflects expectations of strong growth in the nominal economy. We are either pricing in rising inflation or a growing economy. With a growing nominal economy, investors should look to infrastructure as a cyclical play as well.
AIRR provides investors with a targeted exposure to small- and mid-cap U.S. manufacturers and infrastructure companies. Bernstein explained that 95% of the fund is composed of industrials, with a small 5% in regional banks that lend to these companies. Sub-sector allocations include a 35% construction and engineering, along with 23% construction machinery, so 58% of the underlying portfolio is directly related to construction and infrastructure.
“The RBAAIR index methodology focuses on small and mid-cap companies which we believe are positioned to benefit from increasing manufacturing market share in the U.S. vs. their larger-cap peers,” Bernstein said in a note. “Indices which utilize a market capitalization weighting methodology will generally have more emphasis on larger-cap companies which rely more heavily on international markets for revenues.”
First Trust RBA American Industrial Renaissance ETF