New American Industrial Renaissance ETF Hits The Market [Vanguard Industrials ETF, Sector Spdr Trust Sbi, iShares Dow Jones US Industrial (ETF)]

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March 26, 2014 3:52pm NASDAQ:AIRR NYSE:FXR

wall streetSoft manufacturing data at the start of the year has been unfavorable for the U.S. industrial ETFs, but ETF issuers are enthusiastic about the long-term potential of the sector. This is further validated by First Trust’s recent launch targeted on the U.S. industrial sector.

First Trust – ranked among the top-10 issuers for ETFs – normally structures its products in a slightly different manner rather than just focusing on the market cap for weights. It has maintained this trend this time too by focusing on the medium-to-smaller capitalization of the spectrum which is likely to provide investors a greater return and by incorporating some banking stocks.

This fresh fund — First Trust RBA American Industrial Renaissance ETF– hit the market on March 11 and trades with the ticker symbol ‘AIRR’ on the Nasdaq exchange.

AIRR in Focus

The new ETF looks to have exposure to the Richard Bernstein Advisors American Industrial Renaissance Index. The index intends to indentify the small and mid cap U.S. companies in the industrial and community banking sectors, per the issuer.

The index first targets Russell 2500 Index and removes companies not directly linked to manufacturing and related infrastructure and banking. Banks will be selected from states regarded as traditional manufacturing hubs. However, bank stocks will be capped to the limit of approximately 10% of the index at rebalance.

The index will not pick up the companies recording non-U.S. sales greater than or equal to 25%. The index will also look for positive 12-month forward earnings estimates to include stocks under its coverage.

AIRR will follow a less concentrated approach while putting weight in a particular stock. No stock will account for more than 3% of the total index at rebalance. Other necessary criteria include minimum share price of $6, market cap of at least $200 million and liquidity of at least $500,000 trading volume on average each day. The ETF looks to charge 70 bps in annual fees and expenses for this relatively unique exposure.

How could it fit in a portfolio?

This ETF could be appropriate for investors seeking a play on the U.S. manufacturing revival. The U.S. industrial market has been shaping up extremely well in the U.S. thanks mainly to lower energy prices, improving technology and rising labor costs in developing economies.

Moreover, the U.S. economy has come a long way from the meltdown that occurred several years ago. All economic indicators are improving from the pre-crisis level hinting at rising domestic demand for industrial equipment. A European revival has also contributed to the industrial growth in the U.S.

As per Richard Bernstein Advisors (RBA), growing availability of bank financing for manufacturers is also driving the sector. All these factors are providing the U.S. a competitive advantage over other nations. Consequently, a new trend called “reshoring” – return of manufacturing jobs to the U.S –is being followed by many U.S. companies (read: 3 ETFs for Manufacturing “Renaissance”).

In such a scenario, it would good idea to bet on AIRR. Considering today’s stock market dynamics and paradigm shift in the manufacturing industry, the fund should assure investors steady returns. Also, mid and small caps stocks tend to offer higher returns than their large counterparts though at the cost of higher volatility.

Per RBA, the index will focus on smaller U.S. banks which normally report higher profitability ratios as these do not need huge trading infrastructure and are less vulnerable to global risks. RBA also believes that manufacturers will look to smaller banks for funding their operations. This is the reason AIRR opted for some banking stocks and will likely well serve investors’ requirement going forward.

ETF Competition

While the ETF certainly looks to tap one of the promising sectors of the steadily improving U.S. market, it is by no means the only industrial ETF on the market. There are actually a handful of other products already available in the space with SPDR Industrial Select Sector ETF (NYSEARCA:XLI) ruling the category with as much as $9.2 billion in assets.

The top three funds in the space include Industrials ETF (NYSEARCA:VIS) and iShares U.S. Industrials ETF (NYSEARCA:IYJ) are made up of large-cap stocks unlike AIRR and are even cheaper. This could trouble AIRR in finding interested investors.

First Trust itself already has a product in the space called First Trust Industrials/Producer Durables AlphaDEX Fund (NYSEARCA:FXR) that charges the same as AIRR but comprises mainly mid and large cap stocks and follows a different strategy. Also, very few funds in the space will have banking exposure like AIRR.

Since AIRR is a pricier option in the space, it needs to promote its capitalization style and investment strategy to attract investors’ attention, though if the American industrial renaissance continues, the issuer could have a winner with this new niche fund.

This article is brought to you courtesy of Eric Dutram.

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