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‘Closer to local design and demand’: Engine No. 1 launches Transform Supply Chain ETF in wake of COVID disruptions

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Activist fund Engine No. 1 is offering an exchange-traded fund that invests in companies supporting the relocalization of U.S. supply chains in North America, a transformation the firm expects to accelerate as a result of the COVID-19 pandemic. 

The Engine No. 1 Transform Supply Chain ETF will begin trading under the ticker “SUPP” on Wednesday, according to Eli Horton, the fund’s lead portfolio manager who last year joined the firm’s investment team from hedge-fund firm Maverick Capital. 

“We’ve all experienced how fragile the global supply chain is,” Horton said by phone. “We think companies will improve their competitive positioning” by making “economic decisions” to relocalize their supply chains after years of turning to low-cost labor in regions such as Asia. 

In December, Engine No. 1’s chief executive officer Jennifer Grancio told MarketWatch that the firm was leaning on Horton’s former hedge-fund experience to help with its expansion of actively-managed ETFs funds targeting “huge transformational investment opportunities.”

See: Why Engine No. 1 has turned to ‘ex-hedge fund’ talent to expand active ETF lineup

Global supply-chain disruptions during the pandemic resulted in lost income for many businesses, according to Horton. As a result, he said companies are now actively looking to adjust their supply chains so that manufacturing is “closer to local design and demand.”

The Engine No. 1 Transform Supply Chain ETF is investing across three core areas, including manufacturing, automation and innovation, and “critical transportation partners,” said Horton. 

In the area of automation and innovation, the ETF has exposure to Rockwell Automation Inc.
a Milwaukee-based company whose products and technology are “embedded into almost every factory and plant floor,” according to Horton. 

As for manufacturing, the fund holds two “very critical suppliers of materials to manufacturing,” he said, citing Raleigh, North Carolina-based Martin Marietta Materials Inc.
and Vulcan Materials Co.
in Birmingham, Alabama. And in the area of transportation, Horton said the ETF has exposure to Canadian Pacific
a railway that operates in North America. 

“Industrial goods that will be needed to build out the supply chains have to travel by rail,” he said. Canadian Pacific runs east to west across North America, while its recent acquisition of Kansas City Southern means the company can also support businesses building out their supply chains from southern Mexico to Canada, according to Horton. 

The holdings of Engine No. 1 Transform Supply Chain ETF will largely be in the U.S., with the fund using a “rigorous fundamental research process” to identify companies that are the best expression of the theme and areas it’s targeting, he said.

The actively-managed ETF has a fee of 0.75%.

Yasmin Dahya Bilger, head of ETFs at Engine No. 1, said by phone that actively-managed strategies and thematic investing are “key growth areas” in the ETF market. While investors had long equated ETFs with “market-cap, passive investing,” she said “that linkage has been fully broken” over the past three years. 

Read: Active vs. passive? Why active ETFs face competition from ‘quasi-active’ smart beta funds in U.S. stock market

In thematic investing, she said clients want “satellite exposures in their portfolio to complement around their market-cap exposure.” 

The firm’s new fund is its third ETF in the market, after Engine No. 1 Transform 500 ETF
and the actively-managed Engine No. 1 Transform Climate ETF

“We’ll just be layering on these satellite exposures where I think we’re bringing the best of Engine No. 1 across our active investment and active ownership capabilities,” she said.


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