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Dismal U.S. Industrial Output Puts Focus on ETFs

Sweta Jaiswal, FRM

The latest U.S. industrial production data disappointed investors. Industrial production, which measures overall factory, mining and utility output, hit the all-time low since May 2018 by dipping 0.8% in October 2019 compared with the upwardly revised 0.3% fall in September.  On a year-over-year basis, industrial production declined 1.1%. Diminishing output levels for the third time in the past four months also compare unfavorably with analysts’ expectations of a 0.4% slip per a Reuters’ poll.

It is believed that industrial output levels are getting affected by weak global demand due to slowing worldwide economic growth, strong dollar, soft business investment,  uncertainty over international trade policies and the problems faced by the Boeing Co (read: 4 Ways to Play Dow Jones With ETFs).

Insight Into Data

Manufacturing output slid 0.6% in October, largely due to an 11.1% drop in motor vehicle production. Since a recent peak in July, there was a 2.5-million decline in assembled cars and trucks during October to an annual rate of 9.14 million units. The Fed report also highlighted that a 1.2% decline in durable goods output was due to the strike at General Motors. However, U.S. manufacturing output was down 0.5% along with 0.2% decrease in the durable goods despite eliminating motor vehicles and parts.

Overall, Fed data highlighted a 0.6% decline in the manufacturing output from September and a year-over-year fall of 1.5%. Moreover, mining production was also down 0.7% in October along with 2.6% deterioration in utilities. Capacity utilization, which gauges the efficiency of firms in utilizing their resources, also slipped to 76.7% from 77.5%, marking the lowest level since September 2017.

Meanwhile, there was a 0.1% increase in the production levels of computers and related products whereas communications equipment output fell 0.4%.

Looking Forward

US economic growth has been getting a boost from decent consumer spending. Once again, U.S. retail sales inched up 0.3% sequentially in October, beating market expectations of a 0.2% rise. Sales rebounded to soar from a 0.3% dip in September. Rising purchases of motor vehicles and higher gasoline prices led to this upside. Year over year, retail sales grew 3.1% compared with 4.1% in the previous month.

Notably, the US economy is also bearing the brunt of Sino-US trade spat.  Some analysts believe that the speed at which ‘attacks and retaliations’ took place followed by the decision reversals in this trade brawl escalated the ambiguity in the global markets.

Such periods of extreme unpredictability keep investors on edge, making it difficult for business houses to plan a concrete business strategy and capital expenditures. Moreover, there is no denying that global economic growth is grappling with the ongoing trade tussle. However, per the latest updates, the United States and Beijing are close to striking a trade deal (read: Phase 1 Trade Deal or Not: ETFs to Ride the Trend).

Industrial ETFs in Spotlight

Against this backdrop, investors can take a look at the following ETFs:

The Industrial Select Sector SPDR Fund XLI

The fund tracks the Industrial Select Sector Index (read: Don't Fear Yield Curve Inversion, Play These Top ETFs Instead).

AUM: $11.4 billion

Expense Ratio: 0.13%

YTD Return: 27.4%

Vanguard Industrials ETF VIS

The fund tracks the MSCI US Investable Market Index (IMI) Industrials 25/50 Index.

AUM: $3.7 billion

Expense Ratio: 0.10%

YTD Return: 28.1%

iShares U.S. Industrials ETF IYJ

The fund tracks the Dow Jones U.S. Industrials Index.

AUM: $970.7 million

Expense Ratio: 0.42%

YTD Return: 29.9%

Fidelity MSCI Industrials Index ETF FIDU

The fund tracks the MSCI USA IMI Industrials Index (read: ETFs in Focus as US Manufacturing PMI Data Disappoints).

AUM: $462.3 million

Expense Ratio: 0.08%

YTD Return: 28.5%

First Trust Industrials/Producer Durables AlphaDEX Fund FXR

The fund tracks the StrataQuant Industrials Index.

AUM: $365.6 million

Expense Ratio: 0.62%

YTD Return: 31.3%

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Fidelity MSCI Industrials Index ETF (FIDU): ETF Research Reports
 
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
 
Vanguard Industrials ETF (VIS): ETF Research Reports
 
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR): ETF Research Reports
 
Industrial Select Sector SPDR Fund (XLI): ETF Research Reports
 
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