This ETF Has Crushed the Dow Jones and S&P 500 in 2024. Here's How It Can Keep Winning in 2025.

Stock market investors have a lot to cheer about as 2024 comes to a close. The S&P 500 index has returned a fantastic 27% thus far in 2024 while the Dow Jones Industrial Average is up a solid 17% amid a resilient macroeconomic backdrop.

Following the U.S. presidential election, the market is building optimism that the economy can gain further momentum. Proposed policies from the incoming Trump administration are expected to support growth in American companies and domestic manufacturing as a new market tailwind.

One exchange-traded fund (ETF) well-positioned to benefit from these dynamics is the First Trust RBA American Industrial Renaissance ETF (AIRR -0.81%). The fund has climbed 42% year to date, crushing the S&P 500 and the Dow Jones with a unique strategy. Let’s explore how the AIRR ETF stands out and why this rally can keep going in 2025.

What is the AIRR ETF?

Investors have access to a vast array of ETFs, offering convenient exposure to diversified baskets of stocks and other assets. While the First Trust RBA American Industrial Renaissance ETF may not be a household name, this $2.9 billion fund deserves closer examination.

AIRR passively tracks an index measuring the performance of small- and mid-cap U.S. companies in the industrial and community banking sectors. The “renaissance” theme reflects AIRR’s investment philosophy focusing on manufacturing companies that primarily operate and serve the domestic market.

Companies with local production facilities can leverage distinct U.S. advantages over overseas competitors, including a highly qualified labor force, pro-business policies, and access to advanced technology for quality product delivery. The fund’s smaller banking sector component recognizes that regional financial institutions often maintain close relationships with these capital-intensive manufacturers while capturing similar growth drivers.

According to the fund methodology, companies eligible for the AIRR ETF must meet these criteria:

• Direct involvement in manufacturing, infrastructure, and/or banking.
• Generate 75% or more of revenues within the U.S.
• Projected positive earnings for the next 12 months based on Wall Street consensus estimates.

This focus on high-quality companies through specific filtering criteria aims to generate positive long-term shareholder returns. The strategy has proven successful. Since its inception in March 2014, AIRR has returned 326%, outperforming the S&P 500’s 293% total return.

AIRR Total Return Price data by YCharts

Strong momentum into 2025

What’s impressive about AIRR’s returns history is that it was achieved without high-profile megacap technology sector investments, which have driven stock market gains over the past decade. This highlights the ETF’s strength as a portfolio diversifier, providing exposure to lesser-known smaller companies.

Within AIRR’s current top five holdings, Granite Construction stands out with an 83% year-to-date gain. The company’s focus on major public works projects has benefited from increased U.S. infrastructure spending. Two other notable holdings showing strong 2024 performance are Applied Industrial Technologies, which manufactures infrastructure equipment including hydraulic control products, and AAON, a U.S.-based heating, ventilation, and air conditioning (HVAC) systems manufacturer.

AIRR Total Return Price data by YCharts

Given AIRR’s portfolio of 54 current stocks, each with a weighting under 3.5%, the performance of a single stock is not necessarily important compared to the fund’s broader theme of infrastructure investments and a rebound of industrial activity.

President-elect Donald Trump’s “America First” campaign platform had an expectation for new tariffs targeting foreign capital goods. AIRR ETF companies manufacturing domestically could benefit from increased demand as buyers seek U.S. alternatives to avoid higher prices. Additional initiatives like the possibility of corporate tax cuts could further boost these businesses. All this is in an environment of subdued inflation, which has facilitated recent Federal Reserve interest rate cuts.

In my view, all the pieces are in place for favorable economic conditions to continue as a great setup for the AIRR ETF into the new year.

Final thoughts

I’m bullish on the First Trust RBA American Industrial Renaissance ETF and expect shares to trade higher next year.

That being said, as with any investment, caution is warranted. The main risk is potential economic deterioration, which would likely pressure companies within the AIRR ETF. Additionally, the fund’s 0.7% expense ratio is relatively high compared to other ETF options. Still, AIRR offers solid exposure to under-the-radar industrial small-caps. Long-term investors may find it a worthy complement to a diversified portfolio.