As more investors take the Financial Personality Assessment, it’s no secret that many people have strong Viewpoints on where the world is going and which themes will shape our collective future. The last few years, issues related to supply chain and domestic production have come into view front and center. We sat down with Emles, creators of the Made in America ETF (AMER), to understand where they see advantages for U.S. production growth and the future of domestic manufacturing. AMER provides investors exposure to companies that potentially stand to benefit from increased manufacturing domestically.
TIFIN Personality: As impacts of COVID start to subside, what do you see in the future of domestic production?
Emles: I view a dial back in COVID impacts as a tailwind to domestic production as supply chains improve, inflation to supply cost eases, and inventory cycles normalize across distributors. Half a year after the McKinsey Global Institute published its article highlighting the importance of bolstering investment in US manufacturing to drive better labor and productivity outcomes, we see billions of dollars of federal money granted to commercial names in infrastructure, semiconductors, and aerospace for the sole purpose of advancing domestic manufacturing contribution to US GDP. Even with the emergence of the latest Omicron variant, jobless claims remain at historic lows as PMIs remain elevated—implying stability to the manufacturing workforce—a critical component of the domestic production formula.
TIFIN Personality: For AMER, is it more of a question of patriotism or supply chain or something different? Or all of the above?
Emles: We’ll never shy away from a patriotic pitch, but at the core of this product is an investment thesis focused on the propensity of US manufacturers to innovate, embrace technology, meet demand, and
bolster revenues. Over time, we believe these trends will lower productivity-adjusted labor
costs and improve margins – allowing investors to prioritize price stability and manufacturing revenues of domestic supply lines against scenarios involving labor uncertainty, trade dispute, and supply/demand shocks.
TIFIN Personality: How do you approach large multinational companies that may be based in the US but have a global footprint?
Emles: Our methodology for the Emles American Manufacturing Index, the index behind the Emles Made in America ETF, describes a transparent, rules-based approach that breaks down what it means for a company to be “based in the US” by filtering our base universe against companies’ headquarter location, listing exchange, domestically derived revenues, and domestic manufacturing capacity. Assuming all other criteria are satisfied, multinational manufacturers with more than 30% revenue derived outside of the U.S. are excluded from the index. Special consideration is afforded to eligible names with Canadian revenues, such that names with non-US/Canada revenues of more than 15% are also excluded.
TIFIN Personality: Is there an environmental angle to domestic production and reducing the distance from consumer to product?
Emles: From financing domestic manufacturers to cutting carbon impacts from distribution and consumption, we live in a world today with tangible financial incentives to managing ESG factors at the corporate level. More and more, direct investment and credit are awarded on the basis of ESG merits – my mind jumps to the American Innovation and Manufacturing (AIM) Act – a bipartisan effort (straddling 2 very different administrations) expected to reduce carbon dioxide emissions by 4.5 billion tons – all in the name of domestic manufacturing.
TIFIN Personality: What are some risks that investors should keep in mind when exploring this space?
Emles: America’s manufacturing economy remains susceptible to macro risks that affect the broader equity market. Students of the market will recognize that manufacturing PMIs remain sensitive to inflation risk and labor risk – particularly upstream supply inflation, labor cost inflation, and labor supply. Supply chain risk remains top of mind as well as the inability to import raw material (or the inability to distribute finished goods) dealt a blow to domestic producers unable to realize revenues and/or manage producer inventory of goods. Finally, trade dispute remains a 2-way risk as excessive trade dispute threatens to strain domestic manufacturing resources and supply, while an entirely benevolent trade regime encourages distributors to seek readily available, cheaper manufacturing costs outside of the US.
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