Investment implications of Industry 4.0: evidence from smart manufacturing ETFs

The rise of smart manufacturing, driven by digital transformation and Industry 4.0, has introduced new opportunities for investors seeking to diversify their portfolios. Smart manufacturing ETFs offer a unique risk-return profile tailored to the evolving landscape of industrial automation and data-driven processes. This paper explores the comparative risk-adjusted performance of a smart manufacturing ETF, a conventional industrial portfolio, and a broad-market SP500 tracking portfolio, utilizing daily data from October 2019 to October 2022. By deconstructing the excess returns of these portfolios through one-factor, three-factor, and five-factor asset pricing models, we provide insights into the risk exposure and performance drivers of smart manufacturing investments. Results indicate that investing in smart manufacturing, while less performant relative to the other investments, carries less exposure to market risk and can provide important diversification benefits to equity portfolios. Moreover, there is a positive loading for the size factor and a negative loading for the value and profitability factors for the smart manufacturing portfolio during a period of positive premium for all factors except for size. This implies that the consequent payoff in terms of profitability will eventually turn the loading of the profitability factor into positive territory, increasing returns on smart manufacturing investing.