ETFs To Play On A Manufacturing “Renaissance” In The U.S. [Vanguard Industrials ETF]

manufacturing growthThe U.S. Industrial sector is due for a trend reversal this year mainly to reflect the reduced wage differential between developed and emerging economies. It is widely believed that North America and Western Europe are high-cost nations and Latin America, Eastern Europe, and most of Asia — especially China — are low cost destinations. However, the rising wages in emerging countries and sluggish rise in hourly wages in developed nations have gradually been filling the gap.

This has given birth to the trend of ‘reshoring’ which basically means the return of manufacturing hubs to the U.S. BCG’s latest reports shows that steep wage rises in emerging nations, sluggish productivity growth, strengthening of the U.S. dollar against a basket of emerging currencies and a sharp rise in energy costs in those nations have marred the appeal for offshoring activities.

Narrowing Wage Differential

At the time of the launch of its Industrial Renaissance ETF (AIRR) this year, First Trust provided some data issued by the Economic Policy Institute which says, during the crucial recession period of 2007 to 2012, wages in the U.S. declined for the bottom 70% of U.S. workforce despite productivity expansion of 7.7%.

Average hourly earnings in the U.S. are currently rising at a pace of less than 2%while China – one of the greatest manufacturing offshoring destinations – saw wage increases of about 10.7% last year and looks to log another 10% or more rise in wages this year.

Minimum wages should rise until the mark of 40% of average urban salaries by 2015 is attained, according to a guideline issued by the State Council in February 2013, to deal with the country’s broadening wealth gap. As a result, China’s manufacturing-cost advantage over the U.S. has fallen to less than 5%.

Not only this, but manufacturing costs in eastern European nations – also offshoring havens – are at now equivalent to or above the level in the U.S. Apart from the U.S., the U.K. and the Netherlands in Western Europe and Mexico in Latin America can now be picked as low cost manufacturers.

Manufacturing “Renaissance” in the U.S.

Wages aside, there are also other factors that positively influence manufacturing or industrial activity in the U.S. Relatively low energy prices when compared to many of its global competitors are also playing a vital role in this boom.

The U.S. economy has now come a long way from the meltdown that occurred five years back. All economic indicators are improving from the pre-crisis level hinting at rising domestic demand for industrial equipment.

The European revival has also contributed to 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 should facilitate U.S. industrial and manufacturing companies to gain market share.

While there are several other factors to consider before shifting the manufacturing base from one nation, a company should also consider the proximity of target customers from the manufacturing base, as per BCG. But wage and currency are significant factors, and are lately providing all the needed support to the U.S. industrial sector  (read: Play Surging U.S. Manufacturing with These Industrial ETFs).

Funds discussed below offer targeted bets on the sector and can help investors garner profits if the wage differential continues to narrow down and if the U.S. continues to become a manufacturing powerhouse once more:

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