U.S. Markets closed

Industrial ETFs in Spotlight as U.S. Manufacturing Picks Up

Sweta Jaiswal, FRM

All hopes of a rate cut rest on the two-day meet of Fed officials on Sep 17. Meanwhile, the U.S. industrial production report was released by the central bank. In spite of the trade war tensions and global economic slowdown, the report reflects a steady increase in U.S. manufacturing output in August (read: ETFs to Gain/Lose as Fed Rate Cut Less Likely).

Manufacturing output, which accounts for 11% of the U.S. economy, increased 0.5% in August as against an unrevised 0.4% decline in July. The metric also surpassed analysts’ forecasts of a 0.2% rise, according to a Reuters’ poll. The upside was driven by a rise in production levels of machinery and primary metals. Meanwhile, after ignoring the 1% decline in motor vehicles and parts production, there was a 0.6% rise in manufacturing output in August.

Thus, the industrial production index, where manufacturing output comprises a major part, rose 0.6%, beating analysts’ forecast of 0.2%.

However, on an annual basis, total industrial production was up 0.4% in August, whereas manufacturing declined 0.4% (read: 5 ETF Zones to Watch Ahead of Fed Meeting).

What Led to the Upside?

The machinery production also rebounded in August with a 1.6% rise against a 1.7% decline in July. The mining output also rose 1.4% in August. There was a 0.6% rise in utilities output as well.

Capacity utilization, the gauge for studying how efficiently firms are utilizing their resources, rose to 75.7% in August from 75.4% in July for the manufacturing sector. Moreover, the same metric for the industrial sector increased to 77.9% from 77.5% in July. Furthermore, there was a 0.4% rise in final products output along with a 0.2% increase in consumer goods and 1.0% uptick in business equipment. Moreover, nonindustrial supplies production rose 0.8% and materials was up 0.9%.

It is believed that the recovery in the workweek also drove manufacturing output. According to the BLS, the manufacturing workweek declined to 40.4 hours in July, its lowest level since November 2011, and then rose to 40.6 hours.

Moreover, domestic demand continues to remain strong with hiring and consumer spending levels maintaining momentum.

Will the Strength Last?

The latest set of data however contradicts the surveys of purchasing managers and other executives published by the Institute for Supply Management and IHS Markit.  In this regard, Chris Rupkey, chief financial economist at Mitsubishi UFJ Financial has said, “purchasing managers say the manufacturing sector is in recession, but the contraction in factory production actually looks much more modest. The trend is looking more like a modest midcycle correction, which begs the issue of whether the Fed’s midcycle correction in interest rates is drawing to a close”.

Moreover, the current business conditions and confidence do not look encouraging. The Empire State Manufacturing Survey’s general business conditions index, compiled by the Federal Reserve Bank of New York, stood at 2.0 in September, as against 4.8 in August and 4.3 in July. Notably, a positive index reading indicates expanding activities. Moreover, the U.S. factory sector is grappling with issues like slowing global economic growth, trade war with China and strong dollar that is eventually making exports unattractive (read: High-Yield ETFs at a 52-Week High Ahead of Fed's Decision).  

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: $10.04 billion

Expense Ratio: 0.13%

YTD Return: 22.4%

Vanguard Industrials ETF VIS

The fund tracks the MSCI US Investable Market Index (IMI) Industrials 25/50 index (read: U.S. Manufacturing Shrinks: Sector ETFs That Grew).

AUM: $3.60 billion

Expense Ratio: 0.10%

YTD Return: 23.9%

iShares U.S. Industrials ETF IYJ

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

AUM: $936.2 million

Expense Ratio: 0.42%

YTD Return: 24.5%

Fidelity MSCI Industrials Index ETF FIDU

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $445.4 million

Expense Ratio: 0.08%

YTD Return: 23.8%

First Trust Industrials/Producer Durables AlphaDEX Fund FXR

The fund tracks the