Investors are eyeing a wide-range of manufacturing-themed exchange-traded funds – from traditional to technological – to play an anticipated rebound in the global sector.
After years of volatility and the potential easing of global trade tensions between the United States and China, global growth is expected to be driven by an uptick in the manufacturing sector, according to a 2020 outlook report from Blackrock Inc. The sector is expected to be driven by a growing need for everything from cars and capital goods to semiconductors.
Portfolio managers are beginning to shift into cyclical stocks and emerging markets that could benefit from a renewed industrials sector.
“We’ve had a pretty big manufacturing-sector slowdown caused by numerous issues, but that’s in the rear-view mirror,” says David Kletz, a vice-president and portfolio manager at Forstrong Global Asset Management Inc. “We’re buoyed by the positive progress on geopolitical issues and leading indicators are showing signs of bottoming, so all of these ingredients are a fertile environment to have somewhat of a rebound or stabilization.”
Broad-based ETFs such as the Vanguard Industrials ETF (VIS) and the Industrial Select Sector SPDR Fund (XLI), which span the sector and hold large manufacturers including Boeing Co. and aerospace and technology manufacturer Honeywell International Inc., are among the more obvious routes to investing in a manufacturing uptick, Mr. Kletz says. The funds are up 27.2 per cent and 27.6 per cent respectively over the past year as of Jan. 9, trailing just behind the S&P 500’s 29.2-per-cent climb over the same period.
But as VIS and XLI focus on American companies, investors could miss out on opportunities in international markets where manufacturing is a key economic driver, such as Germany, Mr. Kletz says. He points to the iShares MSCI Germany ETF (EWG), as well as the iShares MSCI Poland ETF (EPOL) and iShares MSCI Sweden ETF (EWD), the latter of which is overweight in industrials at 36.7 per cent.
“The epicentre of this manufacturing weakness in recent years was Germany, the world manufacturing powerhouse,” Mr. Kletz says. “Both economies [Poland and Sweden] are built to supply the German supply chain, so a large proportion of Sweden’s equity market is in industrials, and Poland is highly influenced by German demand.”
But market watchers remain cautious as the global industry still faces challenges. Last month, U.S. national factory activity fell to its lowest point in more than a decade as the U.S.-China trade war put a damper on orders and employment, according to the Institute for Supply Management. The drop came amid speculation that a long-awaited initial deal between the two countries would level out the sector.
And even as foreign markets are expected to lead a global manufacturing revival, the U.S. sector would also need to recover to see an uptick, says Jeff Leung, vice-president and senior investment adviser at Wellington-Altus Private Wealth Inc.
With the U.S. headed into an election year in 2020, Mr. Leung says the Trump administration’s policies and campaign promises targeted at keeping jobs in America could have a positive effect on the country’s lagging manufacturing industry.
Mr. Leung cites the First Trust RBA American Industrial Renaissance ETF (AIRR), which tracks small- and mid-cap U.S. companies in the industrial and community banking sectors that could benefit from a manufacturing revival and has risen 12.5 per cent over the past three months as of Jan. 10, according to Bloomberg data.
“It’s interesting that this ETF is targeting small- and medium-sized companies that would obviously benefit from government policies that [U.S. President Donald] Trump has focused on bringing manufacturing jobs to America,” Mr. Leung says.
Drilling deeper into specific manufacturing industries, Mr. Leung says thematic ETFs that invest in high-demand products can provide investors with exposure to key growth sectors.
Funds such as the SPDR S&P Aerospace & Defense ETF (XAR) and the Global X Robotics & Artificial Intelligence ETF (BOTZ) invest in companies that could benefit from the need for commercial and military aircraft and other defense equipment, as well as industrial robotics and autonomous vehicles.
“From a manufacturing perspective, we believe that the demand for industrial robots will not go down,” Mr. Leung says, adding that BOTZ saw strong performance over the last three months, rising 15 per cent – climbing higher than the broader XLI’s 12 per cent increase as of Jan. 9, according to Bloomberg data.
Keith Richards, president and chief portfolio manager at ValueTrend Wealth Management Inc., increased his position in XLI in the last quarter of 2019 – when the sector started showing signs of turning around – and is now considering broader routes to play off of a revived manufacturing sector.
“Right now, the charts aren’t really saying that manufacturing is going up yet,” Mr. Richards says. “XLI did break out, but compared to the market, industrials are not yet showing signs of being a leading group. We’re not convinced that that’s where we want to put our money.”
Instead, Mr. Richards points to funds that include companies in emerging markets that would intuitively benefit from a manufacturing rebound. He holds the BMO MSCI Emerging Markets Index ETF (ZEM), a broad emerging-markets fund that is largely exposed to Chinese markets, and the Emerging Market Internet & Ecommerce ETF (EMQQ), which holds internet-services and technology companies such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
“There is a lot of money flowing into emerging markets charts like China, Brazil and Korea,” Mr. Richards says. “These companies do everything from parts for smartphones to carbon bicycle parts, so the tech and internet companies in these funds all play into that.”