Reshoring Movement Could Be Small-Cap Catalyst | ETF Trends

Amid geopolitical tensions with China and lessons learned from the supply chain shocks endured as a result of the coronavirus pandemic, among other factors, the movement to reshore more formerly American industry is gaining momentum.

Not surprisingly, there are investment implications, but what might surprise market participants is that small-cap firms are credible avenues for participating in the nascent reshoring effort. That could stoke new interest in exchange traded funds such as the Avantis U.S Small Cap Equity ETF (AVSC) and the Avantis U.S. Small Cap Value ETF (AVUV).

Offshoring started in earnest in the 1970 and accelerated in the decades after as profit-conscious companies based in developed markets, such as the U.S., sought to capitalize on low labor costs in regions such as Asia and Latin America. However, reshoring started gaining momentum earlier this century and has climbed higher as “made in America” took on new allure and as politicians looked to score points with voters.

Beyond those factors, AVSC and the highly rated AVUV could be in the spotlight, as the coronavirus crisis laid bare issues with the American supply chain.

“Companies’ desire to regain control of their supply chains has intensified the reshoring trend. Relying on foreign suppliers has proved increasingly problematic because manufacturing, especially in China, has halted periodically during the pandemic. Shipping costs also have soared, and although U.S. ports are no longer as clogged, overseas shipping delays remain routine compared with pre-pandemic schedules,” noted American Century’s Mike Rode.

The utility of AVSC and AVUV as reshoring plays is easy to understand. For starters, small-cap companies are more levered to goings-on in the domestic economy than large- and mega-cap multinational firms with extensive export exposure. Second, small-cap corporations are often positively correlated to job creation, which is a benefit of reshoring, both in direct and indirect fashion.

“U.S. small-cap companies typically exhibit more sensitivity to the economy than their large-cap counterparts, so we think they are poised to reap the biggest benefits from reshoring. Since 1985, sales growth for U.S. small-cap firms shows an 85% correlation with CapEx growth for firms in the Russell 2000® and S&P 500® indices, compared with 76% from large-cap firms,” added Rode.

Both ETFs are actively managed, meaning the funds’ managers can respond nimbly to reshoring trends. AVSC attempts to beat the widely observed Russell 2000 Index, while AVUV tries to outpace the Russell 2000 Value Index.

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