With 2023 nearly half over, it’s a good time for advisors to ponder what’s been working and what’s been disappointing in equity markets. Assessing what’s populating the more positive camp is a brisk task because a small number of stocks – namely the “magnificent seven” – account for an uncomfortably high percentage of broader market returns.
Conversely, when it comes to what’s not working, that universe is more densely populated. It includes smaller stocks and cyclical value sectors, among other asset classes. Industrial stocks and shares of regional banks are among the most egregious offenders. As such, it’d be reasonable to assume that pairing those groups together under the hood of a single exchange traded fund would be a bad idea.
Surprisingly, that’s not been the case as highlighted by the First Trust RBA American Industrial Renaissance ETF (AIRR), which hit an all-time high earlier this month and is higher by 17.70% year-to-date. To be sure, those are impressive factoids.
The $360.36 million AIRR debuted in March 2014 and follows the Richard Bernstein Advisors American Industrial Renaissance® Index. Roughly 90% of its holdings are comprise of community bank and industrial equities.
AIRR Excellence Is in the Details
As noted above, the cosmetic evaluation of AIRR would appear to support the notion that the ETF should be struggling this year due to its industry exposures. However, a deeper dive indicates why the fund is surprising in positive fashion.
“What makes AIRR’s outperformance this year so remarkable is that, at a high level, none of these categories have performed particularly well this year, yet many of AIRR’s holdings have bucked the trend. In our opinion, there are two key factors helping to drive AIRR’s performance this year: increased spending on infrastructure and a building boom for manufacturing,” according to First Trust research.
While it’s been nearly two years since passage of the Infrastructure Investment and Jobs Act (IIJA), the related $1.2 trillion in promised spending is kicking into high gear, benefiting a variety of AIRR member firms in the promise. That’s validation of infrastructure as an investment theme. Plus, there’s much mor to come regarding IIJA spending.
“According to the Biden administration, over $220 billion has been awarded so far. Now that an agreement to suspend the debt limit has been enacted, spending is full speed ahead. On Monday, another $570 million was awarded for projects to improve railroad crossings,” adds First Trust. “In our opinion, IIJA-funded spending on infrastructure is likely to continue for the next several years.”
AIRR Could Have Defensive Goods
As advisors know, cyclical stocks, including industrials and small-cap financial services fare, are historically vulnerable in recessions. Indeed, there’s considerable debate regarding if or when a recession will arrive, but asset allocators are playing it safe and keeping a short leash on cyclical stocks.
However, with AIRR’s infrastructure exposure, the ETF could prove surprisingly durable in a recession because infrastructure and factory spending that’s financed by the government won’t be derailed by economic contraction.
“A potential recession is generally not good for cyclical stocks, but we believe spending on infrastructure and new factories may be supported by laws enacted over the last few years, especially the CHIPS Act ($280 billion), the Infrastructure Investment and Jobs Act ($1.2 trillion), and the Inflation Reduction Act ($400 billion to $1.2 trillion),” concludes First Trust. “Additionally, despite its relatively strong recent performance, AIRR currently trades at 16.5x forward 12-month earnings estimates, representing a 15% discount to the S&P 500 Index.”