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Will Industrial ETFs Gain From Improving US Output in May?

·4 min read

May’s recently released U.S. industrial output data looks decent despite the tough market conditions. Per the Fed’s recently-released data, total industrial production rose 0.2% in the month. The metric has been increasing in each month of 2022 so far until May, seeing an average monthly upside of about 0.8%.

However, a 0.1% dip in the manufacturing output is little worrying as the Fed is in a hawkish mood to control red hot inflation levels. The decline in the metric follows three months of growth averaging about 1%. There was a 1% rise in utility production. Moreover, mining production witnessed a 1.3% uptick, mainly on strength in the oil and gas sector.

Considering the latest data release, investors can track ETFs like The Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF (VIS), Fidelity MSCI Industrials Index ETF (FIDU) and iShares U.S. Industrials ETF (IYJ), which might gain from an improving industrial output.

Total industrial production increased 5.8% from the year-ago figure in May. According to the Fed’s report, the nondurable manufacturing index inched up 0.1% in May. The durable and other manufacturing (publishing and logging) indices were down 0.2% each in the month.

Capacity utilization for the industrial sector came in at 79% in May, lagging its long-run (1972-2021) average by 0.5%. The manufacturing capacity utilization for the industry, the measure for studying how efficiently firms are utilizing their resources, slightly declined in May to 79.1%, up 1.0 percentage point from its long-run average, per the Fed’s report.

U.S. Grapples With High Inflation Levels

The world’s largest economy continues to struggle with the persistently high-inflation levels. Per the latest Labor Department report, the Consumer Price Index (CPI) jumped 8.6% year over year in May (the maximum since 1981), surpassing the already high Dow Jones estimate of an 8.3% rise. The metric compared unfavorably with the 8.3% rise in April.

Energy, food and shelter stood out as major contributors to the surge in the index. Notably, energy prices rose 34.6% year over year, while gas prices jumped about 49%, according to a Yahoo Finance article.

The core inflation index, which excludes volatile components, such as food and energy prices, rose 6% year over year, beating expectations of a 5.9% rise. The rising inflation levels once again dashed the hopes of inflation peaking in May.

The continued steep inflation levels are also weighing on consumers’ sentiment in the United States. The growing supply-chain disturbances emanating from the ongoing Russia-Ukraine war crisis and the resurging COVID-19 cases in China might trigger concerns over further rising inflation levels.

Fed Chair Jerome Powell raised interest rates by 75 basis points (bps), pushing the federal funds rate between 1.5% and 1.75% to subdue inflation through a tighter monetary policy. This marked the biggest interest-rate increase since 1994. Powell said that the Fed could hike rates by 50 or 75 bps at the July meeting and stressed that the policy will be "sensitive and flexible.” To control hot inflation readings, the Fed hiked rates twice by 0.25% and 0.50% in 2022. The central bank plans to start reducing its balance sheet in June this year.

Industrial ETFs in Focus

In the current scenario, we believe, it is prudent to discuss ETFs with relatively high exposure to the industrial companies:

The Industrial Select Sector SPDR Fund XLI

The Industrial Select Sector SPDR Fund seeks to provide investment results that before expenses, match the performance of the Industrial Select Sector Index. The Industrial Select Sector SPDR Fund has an AUM of $12.87 billion and an expense ratio of 0.10% (read: 5 Sector ETFs to Play Robust May Jobs Data).

Vanguard Industrials ETF VIS

Vanguard Industrials ETF offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. Vanguard Industrials ETF manages an AUM of $3.25 billion and an expense ratio of 0.10%.

Fidelity MSCI Industrials Index ETF FIDU

The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index. Fidelity MSCI Industrials Index ETF has an AUM of $641.7 million and an expense ratio of 0.08%.

iShares U.S. Industrials ETF IYJ

The iShares U.S. Industrials ETF seeks to track the investment results of the Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index. iShares U.S. Industrials ETF has an AUM of $1.06 billion and an expense ratio of 0.41%, as stated in the prospectus.


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