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Industrial ETFs to Gain as U.S. Manufacturing Picks Up

Sweta Jaiswal, FRM
·5 min read

Along with encouraging retail sales data, the latest update on U.S. manufacturing output has pleased investors. Per the Federal Reserve’s recently-released data, the industrial production, including output at factories, mines and utilities, rose 1.4% month over month, reflecting the highest monthly gain since the beginning of 2020.  However, the figure lagged analysts’ estimate of a 3% gain, per a Bloomberg survey. The metric in the United States declined 0.4% in January, 4.6% in March and 12.5% in April, while the same inched up 0.1% in February. Meanwhile, factory production surged 3.8% in May in comparison with the median estimate of a 5% rise, per a Bloomberg article.

Data in Detail

The index gained mainly from 3.8% growth in the manufacturing sector, which witnessed a considerable rise in the manufacturing of aerospace, non-metallic mineral, transportation equipment, furniture and other products. Also, production in plastics, rubber, printing, leather and apparel industries increased. Meanwhile, the mining sector output slid 6.8% from the previous month. Further, output for the utilities sector declined 2.3% due to weakness in electric and gas utilities. Also, Oil and gas well drilling saw a decline of 36.9%, per a Bloomberg article.

In May, capacity utilization for the manufacturing sector, the gauge for studying how efficiently firms are utilizing their resources, was at 62.2%, up 2.2 percentage points from the previous month. However, capacity utilization for the mining sector fell 5.8 percentage points to 75.4%, while that for the utilities sector was down 1.8 percentage points to 69.1%.

Encouraging Data Flowing In

Retail sales in the United States surged 17.7% sequentially in May, breezing past the forecast of an 8% jump. This marked the highest uptick on record in retail sales as the coronavirus-led lockdown eased. May’s retail sales figure topped the record 6.7% jump in October 2001, a month after the 9/11 terrorist attack, and easily surpassed analysts’ expectations of an 8.5% increase. Meanwhile, April’s plunge in retail sales was revised to be a little more moderate than previously reported (-14.7% versus -16.4%).

The latest preliminary report on June’s U.S. consumer sentiment shows that the metric has hit the highest level since 2016, largely due to falling unemployment levels and reopening of economic activities. The University of Michigan’s preliminary consumer sentiment index rose more than 9% to 78.9 in June from 72.3 in May. June witnessed the second straight monthly increase in the metric.

Going on, the latest data on the U.S. housing market seems encouraging even as the number of coronavirus cases continues to rise in the United States. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence for single-family homes surged to 58 points in June from 37 in May and 30 in April (the lowest since June 2012).

Industrial ETFs That Might Gain

Against this backdrop, investors can still keep a tab of the following ETFs (see all industrial ETFs here):

The Industrial Select Sector SPDR Fund XLI

The fund tracks the Industrial Select Sector Index (read: Forget Stay-At-Home Stocks & ETFs, Bet on Easing Lockdown).

AUM: $9.52 billion

Expense Ratio: 0.13%

Vanguard Industrials ETF VIS

The fund tracks the MSCI US Investable Market Industrials 25/50 index.

AUM: $2.93 billion

Expense Ratio: 0.10%

iShares U.S. Industrials ETF IYJ

The fund tracks the Dow Jones U.S. Industrials Index (read: Fed's New Stimulus Regains Confidence: 4 ETF Picks).

AUM: $771.7 million

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF FIDU

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $349.5 million

Expense Ratio: 0.08%

Caveat

The encouraging set of data are coming in at a time when investors are spooked by possibilities of a second wave of coronavirus. More than 2.1 million coronavirus cases have been recorded in the United States, with a death toll of at least 116,000. Per a CNN report, coronavirus cases have surged in 18 states over the past week, with six states reporting more than a 50% jump.

Resultantly, some government and health officials have paused reopening efforts for some time. One of the 19 models currently featured on the U.S. Centers for Disease Control and Prevention website forecasts deaths from the virus to cross 201,000 in the United States by Oct 1, revising the figure upward from 170,000 predicted in the previous week (per a CNN report).

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Vanguard Industrials ETF (VIS): ETF Research Reports
 
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
 
Fidelity MSCI Industrials Index ETF (FIDU): ETF Research Reports
 
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
 
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