The Rails of Reindustrialization

The U.S. railroad industry has evolved in countless ways since its construction played a key role in the country’s first industrial revolution in the 1800s. The GMO Domestic Resilience ETF (DRES) invests in companies we believe will benefit from American reindustrialization.

Thanks to considerable consolidation within the sector over the years, there are currently four major U.S. railroads – Union Pacific, Burlington Northern Santa Fe, CSX, and Norfolk Southern. Each operates on a largely regional basis, with Union Pacific and Burlington Northern focused primarily on the Western part of the United States, while CSX and Norfolk Southern focus on the Eastern part of the country.

While individual railroads compete amongst each other, the U.S. rail sector’s biggest competitor is trucking, which accounts for a much larger share of U.S. freight by volume. We believe that American reindustrialization is likely to be a tailwind for the U.S. rail sector. Building new factories and infrastructure (roads, bridges, etc.) requires a large amount of the heavy commodities that rail moves far better than trucks. Reshoring supply chains also increases the number and quantity of manufacturing nodes on the U.S. map, which increases demand for transportation in general.

In short, we believe that the railroads are a good place to be in a reindustrializing America.

Domestic Resilience’s railroad positions reflect both our overall confidence in the sector and specific views on each name. Union Pacific, our largest holding, is in the midst of a merger with Norfolk Southern. A successful merger would combine Union Pacific’s Western-focused footprint with Norfolk Southern’s Eastern-focused footprint to create a transcontinental railroad owned by a single company.

One of the challenges in the current U.S. rail system relates to the historical evolution of the sector. Having a mix of primarily Western- and Eastern-focused railroads owned by different companies created a number of key bottlenecks in the center of the country (Chicago being the most notorious) where the Eastern and Western rail lines meet. These interchange points, which require handoffs between railroads, often slow transit times and add cost and complexity to the U.S. supply chain, causing many shippers to choose trucking as an alternative.

Creating a single company-owned transcontinental railroad will reduce some of this friction and create more opportunities for rail traffic to spread across the U.S. map, efficiencies that we believe will benefit all shippers and improve Union Pacific’s competitive position. Having all this company-specific activity take place against the backdrop of American reindustrialization provides ample cause for optimism.

We believe regulatory uncertainty surrounding the merger has contributed to Union Pacific’s attractive current valuation. While Union Pacific’s earnings have increased in recent years and the company is run by capable managers, in the Fall of 2025 the company’s stock traded near five-year lows in price and valuation.

We believe the combination of attractive fundamental prospects presently ignored by the stock market provides an attractive entry point for long-term investors.

Indeed, Union Pacific’s strong market position and the prospects for reindustrialization make it an attractive investment even if the merger isn’t completed, which means we can receive the potential benefits of a successful deal without paying up.

The story is similar for our investment in CSX, which has strategic value in a consolidating sector as the last remaining standalone Eastern U.S. railroad. We think successful completion of the Union Pacific-Norfolk Southern deal would open the door for a potential acquisition of CSX. The most likely buyer, Burlington Northern Santa Fe (BNSF), is owned by Berkshire Hathaway. BNSF and CSX announced a partnership in August aimed at working together to improve service for shippers.

That’s a start, but we believe that if Union Pacific completes its acquisition, the pressure on BNSF to do a deal with CSX will only increase. Similar to our case for Union Pacific, we don’t believe an investment in CSX at current valuations requires certainty that an acquisition will take place. Rather, CSX’s own standalone prospects are sufficient to justify an investment, and we’re paying very little for the positive optionality of a potential sale.

Invest in the Opportunity — DRES

The GMO Domestic Resilience ETF (NYSE: DRES) is an actively managed fund designed to provide focused exposure to American manufacturing and the structural forces reshaping the U.S. economy through a disciplined, bottom-up investment approach.

Explore DRES

Go Deeper — The Resilience Rundown

Want to go beyond the headlines? Subscribe to The Resilience Rundown, a monthly newsletter where each issue takes a closer look at the sectors, companies, and investment themes that make up domestic resilience — straight from a portfolio manager's perspective.

Author

Klar_Sam

Sam Klar

Portfolio Manager

Mr. Klar is engaged in portfolio management and research within GMO’s Focused Equity team. Previously at GMO, he was a portfolio manager on the Event-Driven team, and prior to that, he was a member of the Global Equity team. Prior to joining GMO full-time in 2006, he held a co-op position at GMO with the Emerging Markets Equity team. Mr. Klar earned a bachelor's in Finance from Northeastern University.

An investor should carefully consider the fund’s investment objectives, risks, charges and expenses before investing. This and other important information can be found in the fund’s prospectus. To obtain a prospectus, please visit www.gmo.com. Read the prospectus carefully before investing.
Risks associated with investing in the Fund may include: (1) Focused Investment Risk: The Fund invests its assets in the securities of a limited number of issuers, and a decline in the market price of a particular security held by the Fund may affect the Fund's performance more than if the Fund invested in the securities of a larger number of issuers. (2) Market Risk - Equities: The market price of equities may decline due to factors affecting the issuer, its industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the net asset value of the Fund's shares. (3) Management and Operational Risk: The risk that GMO's investment techniques will fail to produce desired results, including annualized returns and annualized volatility.  For a more complete discussion of these and other risks, please consult the Fund's Prospectus.
The GMO ETFs are distributed in the United States by Foreside Fund Services LLC. GMO and Foreside Fund Services LLC are not affiliated.
Disclaimer: The views expressed are the views of the GMO Focused Equity team through the period ending October 31, 2025, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.