Industrial Output Up for Four Straight Months: 4 Fund Picks

A strong rebound in mining output and rise in manufacturing production led industrial output to register its fourth straight month of gains in February. Given such an upbeat trend, investing in mutual funds that have significant exposure to all the major industry groups seems prudent. Notably, the industrials, mining and manufacturing sectors deserve special attention.

Industrial Production Rebounds

Industrial production in February recovered after a forgettable January. The Board of Governors of the Federal Reserve System reported that industrial production increased 1.1% in February, in contrast to a decrease of 0.3% in January. Industrial output registered its biggest increase in four months and advanced at an annual rate of 4.4% last month.

Also, capacity utilization advanced 0.7% to 78.1% last month, marking its highest level since January 2015. Although capacity utilization remained below its long-run (1972–2017) average by 1.7%, it posted growth of 1.3% in the last one year, its largest settlement since April 2008. Moreover, with recent economic data like ISM Manufacturing Index remaining upbeat, it is expected that the economy will be able to expand its capacity gradually. 

Mining and Manufacturing Boost Output

Mining output grew 4.3% last month, after declining 1.5% in January. This was 12% higher than the year-ago figure, its biggest level ever. A strong increase in coal mining, oil and gas extraction, and other related supporting activities contributed to production growth in the mining sector.

Additionally, manufacturing output, which accounts for around 75% of total industrial production and about 12% of the domestic economy, after declining in Januaryrose 1.2% in February, the strongest gain experienced since October 2017. This metric also rose 2.5% year over year. While the durables index increased 1.8%, the nondurables index rose 0.7%. Gains in production of durable and non-durables items fueled the pickup in manufacturing output.

Market Groups Data Upbeat

In major market groups, consumer goods production advanced only 0.1%, but consumer durables climbed 2.8% last month. Moreover, production of non-durable consumer goods rose 1%. Business equipment, which represents about 10% of total industrial output, also advanced 1%. Increase of more than 1% in information processing equipment and transit equipment helped business equipment post strong gains.

Additionally, the construction supplies market group registered output growth of 2.3%. Further, materials output moved 1.6% higher following an increase in all its components. Separately, the ISM Manufacturing Index soared 1.7% from January to 60.8 in February. Notably, the February value of the manufacturing index was the highest since May 2004.

Buy These 4 Industrials Mutual Funds

Gains in major industry groups likemining and manufacturing helped the broader industrials sector gain traction.

This is borne out by the fact that mutual funds related to the major industry groups also registered strong returns. According to Morningstar, the industrials mutual fund category posted year-to-date and one-year annualized returns of 0.7% and 17.9%, respectively.

Against this encouraging backdrop, we have selected four mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive three-year annualized returns. These also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Select Industrials FCYIX seeks capital growth by investing mainly in equity securities. FCYIX invests the bulk of its assets in securities of companies involved in manufacture, development, sales and distribution of industrial products and equipment. The fund is non-diversified and invests in both U.S. and non-U.S. companies.

FCYIX has three-year annualized returns of 9.9%, and an expense ratio of 0.77% as compared to the category average of 1.24%. It invests 83.58% of its assets in one of the key sensitive sectors — industrials. FCYIX has a Zacks Mutual Fund Rank #1.

American Century Global Gold Investor BGEIX invests in securities other than stocks, like debentures, bonds, gold, gold futures, etc. The fund focuses on investing in those precious metals companies that are involved in mining, fabricating, exploring, processing and distribution of gold. BGEIX seeks returns through capital growth and high dividends.

BGEIX has three-year annualized returns of 2.5% and an expense ratio of 0.67% as compared to the category average of 1.38%. It invests 100% of its assets in one of the key cyclical sectors — basic materials. BGEIX has a Zacks Mutual Fund Rank #1.

Fidelity Select Transportation FSRFX seeks capital growth by investing a large part of its assets in securities of companies involved in the design, manufacture and sale of transportation equipment as well as providing transportation services. The non-diversified fund invests in both U.S. and non-U.S. companies.

FSRFX has three-year annualized returns of 6.8%, and an expense ratio of 0.83% as compared to the category average of 1.24%. It invests 99.14% of its assets in one of the key sensitive sectors — industrials. FSRFX has a Zacks Mutual Fund Rank #2.

Fidelity Select Materials FSDPX invest a huge portion of its assets in securities of companies that are mainly involved in mining, manufacture, distribution and processing of raw materials. The fund seeks growth of capital. FSDPX invests both in U.S. and non-U.S. companies.

FSDPX has three-year annualized returns of 6.4%, and an expense ratio of 0.81% as compared to the category average of 1.38%. It invests 88.47% of its assets in one of the key cyclical sectors — basic materials. FSDPX has a Zacks Mutual Fund Rank #1.

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