2 ETFs to Trade Biden’s New Industrial Strategy

Last week, EQT’s Exeter Industrial Value Fund VI closed at $4.9 billion, sailing past its $4 billion target and making it the third-largest U.S.-focused industrial real estate vehicle to do so this year. The U.S. manufacturing base continues to see substantial investment, despite recent softening in factory output and recession concerns.  

If globalization defined world trade for the past 30 years, nearshoring may become the more operative word this coming decade. The First Trust RBA American Industrial Renaissance ETF (AIRR) and the Invesco S&P SmallCap Industrials ETF (PSCI) are two funds capitalizing on the new industrial resurgence within the U.S.  

Both have meaningfully outpaced the S&P 500 over the one-year period, with AIRR up 38.97% and PSCI up 23.47%, compared to the benchmark’s 12.47%.  

More broadly, these two funds do what ETFs do best: give investors broad exposure to winning firms that might lack obvious name recognition or Wall Street coverage.  

Both ETFs focus on the small cap industrial space, though each captures a slightly different facet of the story. Both should see continuing strength due to Biden’s new era of public/private partnerships and federal funding.  

‘Bidenomics’ as an Industrial Policy 

To its credit, the Biden administration is implementing a uniquely “place-based” modern industrial policy, one that aims to reanimate the business clustering that defined America for a century.  

From the Infrastructure Investment and Jobs Act in 2021 to last year’s CHIPS and Science Act and Inflation Reduction Act, the spending on U.S. industrial infrastructure is a deluge.  

A few developments have hit the headlines—Intel’s $20 billion investment in Ohio and TSMC’s $40 billion in new semiconductor manufacturing facilities in Arizona—but most of the reindustrialization story stays “below the fold,” in local papers or industry reports.  

These three acts—in terms of tax benefits, public and private spending—essentially deploy $2.4 trillion, the equivalent of 0.7% of our national GDP, making them collectively the largest public spending effort since Eisenhower’s Federal-Aid Highway Act of 1956, which was 1.86% at the time.  

That earlier legislation funded the interstate highway system, something that lent compounding GDP growth to the economy for the next 25 years and may have given the 1960s its long economic boom.  

ETF Construction 

Launched in 2014, AIRR is a small fund, with $412 million in AUM and an expense ratio of 0.70%.  Despite the ostensibly high cost, the fund has certainly delivered for investors—up 92.67% over the past five years (versus the S&P 500’s 56.85%) and mostly evading the drawdown of 2022.  

AIRR tracks the Richard Bernstein Advisors American Industrial Renaissance Index, which screens the Russell 2500 for small and midcap firms that contribute to the U.S. industrial revival (via either manufacturing or financing). All banks must operate in traditional manufacturing hub states—Pennsylvania, Michigan, Ohio, Illinois, Indiana, etc.—and all firms must generate at least 75% of their sales in the U.S. to make the 50-ticker index.    

PSCI offers a better yield (.83%) and a lower expense ratio (0.29%) but it has exhibited lower long-term outperformance.  

It is far more diversified, with nearly twice as many holdings as AIRR. It is indexed to a subset of the S&P SmallCap 600; specifically, those companies that provide industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace, defense and general manufacturing.   

In terms of holdings, AIRR invests heavily in industrial services, and PSCI leans more widely into the transportation, distribution and commercial service sectors. AIRR’s P/E is currently 16.62 and PSCI’s is 14.20.  

Both ETFs are well-diversified and focused on successful companies unknown to the average retail consumer. Hubbell, AIRR’s largest holding, makes electric utility equipment, and is up nearly 40% year to date on persistent earnings beats and strong orders.  

In PSCI’s top slot: Comfort Systems, a building systems provider, which has seen big profits via data centers and the reshoring of manufacturing more generally. In its last quarter, it saw strong demand in all segments, with year-over-year revenue growth of 32.7%.  

At this point, even though growth and upward revisions keep coming, these top industrials are starting to look expensive at P/Es of 22 to 23. National measures of manufacturing show a softening: The ISM index slid to 46 in June, its eighth month of contraction, with factory activity its weakest in three years. Maybe the cake is baked for this cycle.  

Big Picture Perspective 

From a long-term perspective, however, this industrial buildout theme should be enduring and carry through any approaching near-term recession.  

U.S. industrial capacity has experienced 30 years of stagnation, as our post-Cold War dominance allowed the country to discard supply chain and national security concerns and disperse capital investment to factories worldwide. In 1985, Taiwan didn’t have a single computer chip factory, nevermind the most advanced, irreplaceable platforms in the world. And since joining the WTO in 2001, mainland China’s share of global export has risen from 2% to 15%, easily the biggest measurable shift in human history.  

With U.S. dominance now contested, new efforts at reindustrialization are being prioritized in the highest corridors of power. The Brookings Institution has counted 19 locale-specific programs, with $80 billion of authorized spending dispersed between them.  

Biden’s policy is arguably influenced by Gary P. Pisano and Willy Shih’s notion of the “industrial commons,” in which a thick network of producers, suppliers and skilled workers can pool enduring expertise and opportunity. This in turn creates persistently competitive industries and prosperous communities, ones that can keep their tax base and pay their pension liabilities.  

For investors, small cap industrial ETFs like AIRR and PSCI might be the perfect vehicles for engaging in this new policy direction.