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Industrial ETFs to Shine as US Manufacturing Rebounds in June

Sweta Jaiswal, FRM
·4 min read

The latest report on U.S. manufacturing, released by the Institute for Supply Management (ISM), has instilled optimism among investors. Per the ISM report, the U.S. manufacturing purchasing managers' index (PMI) jumped 9.5% to 52.6 in June (the strongest since April 2019) from 43.1 in May and an 11-year low of 41.5 in April. Notably, any reading above 50 indicates expansion in manufacturing activities. The consensus estimate was 49.5 (per a Reuters’ poll). Notably, 13 of the 18 industries tracked by ISM expanded in June with textile mills, wood products and furniture and related products putting up the strongest performance.

The manufacturing sector, which accounts for 11% of the U.S. GDP, is showing signs of recovery. New orders index soared to 56.4 in June from 31.8 in May. New export orders index surged to 47.6 in June from 39.5 in May. Production index ticked up to 57.3 in June from 33.2 in May. Employment index climbed to 42.1% in June from 32.1% in May. Manufacturing added 581,000 jobs in the last two months. Commenting on the data, Timothy R. Fiore, ISM chair said that “as predicted, the growth cycle has returned after three straight months of COVID-19 disruptions,” per a CNBC article.

Will the Recovery Sustain?

Although there’s a spike in new coronavirus cases, a slew of encouraging economic data indicates that the worst economic scenario might have ended in April. Along with upbeat data, introduction of more stimulus from the central bank and the announcement of Trump administration’s $1-trillion infrastructure spending bill is brightening up the scenario for investors.

The U.S. manufacturing sector showed signs of recovery in the Federal Reserve report released in the mid-June. Per the Federal Reserve’s recently-released data, 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. 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. 

There is some good news coming from the jobs market as well. The U.S. economy added 4.8 million jobs in June, marking the second consecutive month of gains and surpassing economists’ expectations of job gains of 2.9 million. Overall, the unemployment rate was 11.1% in the month of June, again better than the estimate of 12.4%.

The latest report on June’s U.S. consumer confidence shows more-than-expected improvement, largely due to the reopening of the economy and easing quarantine restrictions. The Conference Board's measure of consumer confidence index stands at 98.1, comparing favorably with May’s reading of 85.9, per a CNBC article. Moreover, June’s reading surpassed the consensus estimate of 91, per a Dow Jones’ poll.

Industrial ETFs to 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: Jobs Market Strengthening Fast: 4 Sector ETFs & Stocks to Buy).

AUM: $9.62 billion

Expense Ratio: 0.13%

Vanguard Industrials ETF VIS

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

AUM: $2.80 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: $774.3 million

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF FIDU

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $336.9 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.Around 2.9 million coronavirus cases have been recorded in the United States, with a death toll of at least 130,000. Resultantly, at least 24 states have paused or rolled back reopening efforts for some time which can again derail the economic recovery achieved so far.

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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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