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Will Slowdown in US Manufacturing Hurt Industrial ETFs?

·4 min read

The latest update on U.S. manufacturing output does not look very impressive amid the rising coronavirus cases. Per the Federal Reserve’s recently-released data, industrial production, including output at factories, mines and utilities, declined 0.6% in September. The metric has declined for the first time after gaining for four straight months.

There was a 0.3% decline in manufacturing output in September. Meanwhile, mining output, which includes oil and gas exploration, rose 1.7% in the last month. However, production in the utilities sector declined 5.6%, largely due to a more-than-expected fall in air conditioning demand in the previous month. Going on, in September, capacity utilization for the industry, the gauge for studying how efficiently firms are utilizing their resources, was at 71.5%, down from 77.4% a year ago, per the Fed’s report.

The weakness in industrial sector can aggravate due to the rising coronavirus cases in some parts of the United States. Meanwhile, analysts believe a second round of fiscal stimulus is now absolutely necessary for bringing strength back in the industrial sector.

Current U.S. Economic Scenario

Sales at retail and food services rose 1.9% in September from August and surged 5.4% on a year-over-year basis, according to the US Department of Commerce. In fact, retail sales rose a solid 3.6% in the third quarter compared with the same period a year ago. Also, spending was broad based in September as Americans splurged at bars and restaurants. American shoppers also spent heavily on items such as clothes, sporting equipment and cars, to name a few.

Going on, the latest preliminary report on October’s U.S. consumer sentiment shows that the metric has hit a seven-month high, largely due to an improved economic outlook along with reopening of economic activities. The University of Michigan’s preliminary consumer sentiment index rose to 81.2 from September’s final reading of 80.4, according to a Bloomberg article. The metric also beat median estimate of 80.5, per Bloomberg’s poll.

Moreover, 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 newly-built single-family homes surged to an all-time high of 85 points in October.

The job market has also shown improvements. Going by the U.S. Bureau of Labor Statistics, unemployment rate dropped 0.5% to 7.9% in September, the lowest amid the coronavirus pandemic. Jobless rate not only declined more than expected but fell for the fifth consecutive month. It’s worth mentioning here that the rate touched 14.7% in April, when the pandemic had peaked before subsiding.

Industrial ETFs at Risk

Notably, industrial production has reportedly  recovered from more than half of the declines observed in February to April. However, the September reading is still 7.1% below its pre-pandemic level as seen in February. 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: Biden Or Trump, These 4 ETF Zones Are Set To Gain).

AUM: $12.23 billion

Expense Ratio: 0.13%

Vanguard Industrials ETF VIS

The fund tracks the MSCI US Investable Market Industrials 25/50 index (read: Is it the Right Time to Bet on Industrial ETFs? Let's Explore).

AUM: $3.13 billion

Expense Ratio: 0.10%

iShares U.S. Industrials ETF IYJ

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

AUM: $877.1 million

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF FIDU

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $405.3 million

Expense Ratio: 0.08%

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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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Zacks Investment Research
 
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