Investors are increasingly turning to exchange-traded funds (ETFs) that focus on companies revitalizing or boosting production within the U.S., leveraging governmental incentives.

 

This year alone, around $2.25 billion has been invested in a select group of ETFs spotlighting the 'reshoring' concept, pushing their total assets to a record $9.67 billion by the end of August.

 

"Companies cite reshoring as a significant long-term growth factor. Our objective is to identify the frontrunners or enablers of this trend before it becomes mainstream," remarked Chris Semenuk, head of the actively managed Tema American Reshoring ETF (RSHO.P), launched last year.

 

The assets under RSHO.P have soared from $6 million in May 2023 to $101.5 million by the end of August. The fund has seen a nearly 16% year-to-date increase, compared to the S&P 500's 17.7% gain.

 

Many manufacturers are relocating production to the U.S. to mitigate supply chain issues and sidestep tensions between Washington and Beijing, which are curbing investments in China.

 

In late 2021, Congress authorized over $1 trillion for new infrastructure projects, followed by a bill that allocates another $200 billion for chip manufacturing the subsequent summer.

 

A few significant corporate moves have spurred further interest, such as Taiwan Semiconductor Manufacturing Co's (TSMC) decision to amplify its investment in new Arizona plants to $65 billion, and the federal government's $500 million grant to Century Aluminum (CENX.O) to establish the first aluminum smelter in the U.S. in 45 years.

 

BlackRock is the latest major ETF provider vying for investor funds, as the reshoring theme gains traction due to its prominent role in the U.S. presidential race's focus on economic growth and job creation. BlackRock launched the iShares U.S. Manufacturing ETF (MADE.P) in July.

 

"These stocks could benefit regardless of the election outcome," stated Jay Jacobs, head of thematic and active ETFs at BlackRock, during the latest episode of "Inside ETFs." "It’s an uncommon area of bipartisan agreement."

 

The shares of the ETF have ascended 3.5% over the past 30 days, in comparison with the S&P 500's approximately 0.9% gain, according to LSEG. The new BlackRock fund currently holds nearly $6 million in assets.

 

Prominent performers in the U.S. manufacturing sector include Caterpillar (CAT.N) and Eaton Corp. (ETN.N), which have risen 16.4% and 27.6% year-to-date, respectively. The S&P 500 industrials sector, which includes many companies held by these ETFs, has increased 13.5% this year.

 

Nonetheless, recent weaker-than-expected economic data, including a drop in U.S. manufacturing construction spending, has sparked concerns that U.S. economic growth may be slowing. The Federal Reserve is anticipated to cut interest rates for the first time in years during its September 17-18 meeting to ease monetary policy ahead of any potential slowdown.

 

Simultaneously, some stocks have become more expensive as the broader market has rallied. For instance, the industrial sector is trading at a forward price-to-earnings ratio of 26.7, compared to 19.2 a year ago.

 

"Attractively priced opportunities are sparse; the valuations we saw in early 2020 are no longer present," noted Jeff Muhlenkamp, manager of the $249 million Muhlenkamp Fund, a mutual fund.

 

He also cautioned that reshoring does not guarantee superior returns, pointing out that companies bringing manufacturing back to the U.S. might face higher labor and raw material costs.

 

Whether this will impact the robust growth these funds have seen this year remains uncertain. According to Morningstar, the $1.5 billion First Trust RBA American Industrial Renaissance ETF (AIRR.O), which debuted in 2014, has tripled its assets over the last 12 months. Similarly, the $8.04 billion Global X U.S. Infrastructure Development ETF (PAVE.Z), launched in 2017, has grown by 50% over the same period.