Making ‘Manufacturing’ Call With ETFs

December 04, 2013

Making the most of an Ed Yardeni call on manufacturing with index funds.

Yesterday, Ed Yardeni, president and chief investment strategist of Yardeni Research put out his morning note.

There's nothing special about that; he puts one out every morning, and he's one of the sharpest economists I follow. In his latest note, he continues pounding the table for a "new industrial revolution" backed by increased global manufacturing and access to technology.

Amazon's drone-delivery service that stole headlines all weekend comes to mind.

In street parlance, Yardeni made an interesting "alpha" call. But what's a "beta" investor—in other words, 90 percent of the readers of this site—to do with information like that?

A quick stroll through the ETF Finder won't yield a single fund that claims to be a "manufacturing" play. In fact, of all the sectors or themes in the economy, manufacturing may be the hardest to pin down and the least understood.

What the heck do we mean when we say "manufacturing," anyway?

From a headline perspective, when you read about government statistics in manufacturing, you're generally looking at manufacturing as defined by the Bureau of Labor Statistics. And that's a big, broad list of things, ranging from folks who make food and clothing, to iron mills and car companies, to Apple computers.

There's no single ETF that can package up all these pieces for you. In reality, a call on "manufacturing" this broadly defined is a bit of a combined call on two sectors: consumer non-cyclicals and industrials.

That's a pretty big list of funds to choose from. Our system tracks eight broad-based U.S. consumer non-cyclical ETFs:

Fund Name Symbol Expense Ratio AUM
Consumer Staples Select SPDR XLP 0.18% $6,810,812,904
Vanguard Consumer Staples VDC 0.14% $1,666,854,635
First Trust Consumer Staples Aphides FXG 0.70% $893,748,482
shares U.S. Consumer Goods IYK 0.46% $485,303,157
Guggenheim S&P Equal Weight Consumer Staples RHS 0.40% $89,382,089
Power Shares S&P SmallCap Consumer Staples PSCC 0.29% $51,776,858
PowerShares Dynamic Consumer Staples PSL 0.65% $39,562,160
Fidelity MSCI Consumer Staples FSTA 0.12% $20,788,856

For this reason, a better play would be the ETF on our Opportunities List, the iShares U.S. Consumer Goods ETF (IYK | B-79). Looking at the Fit chart from the segment report on that link, you can see that IYK eschews retailers altogether, and picks up some firms more commonly thought of as cyclical, like Electronic Arts, or industrial, like Ford Motor company. At 0.46 percent, it's a bit pricey, but it tracks and trades well enough for any investor to feel comfortable owning it.

On the industrials side of the equation, things are also a bit tricky. Our analyst pick here is the iShares U.S. Industrials ETF (IYJ | A-93) and it fits the bill.

The expense ratio is identical, it trades like water and it conveniently doesn't include automotive companies, which would have caused some unintentional overlap.

Top holdings are just the kind of thing you might expect with a few exceptions: It includes shipping companies, like UPS, as well as professional services companies, like Accenture.

And another eight broad-based industrials ETFs:

 

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