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Time to Play These Industrial ETFs?

Sanghamitra Saha

The U.S. manufacturing sector has staged an uptrend lately. The sector remains in the expansionary territory with the ISM manufacturing PMI score of 52.6 in July, 53.2 in June, 51.3 in May, 50.8 in April and 51.8 in March. Notably, a reading of 50 or higher points to growth (read: ETFs to Play 16-Month High US Manufacturing Data).

Though the momentum slowed down in July, unnerving a few investors, impressive data for new orders for U.S. manufactured capital goods should calm down the anxious nerves. Investors should note that new orders for U.S.-made capital goods grew for two consecutive months in July as demand for machinery and several other products held up well.

As per the Commerce Department, orders for non-defense capital goods excluding aircraft, which is a barometer for business investment plans, rose 1.6% (sequentially) in July. The figure was the highest in six months and followed the upwardly revised gain of 0.5% for the month of June. The data breezed past Reuters’ forecast of a 0.3% rise in core capital goods orders. What investors should celebrate is that July number marked ‘the first back-to-back increase since January 2015.”

A relatively subdued greenback helped the sector as U.S. goods became less pricey. On the other hand, the long-tottering energy sector has shown signs of improvement lately, though by a slight measure. But this in turn probably raised capex spending for by energy firms. If this was not enough, a still-low interest rate environment also favored the industry as it depends heavily on borrowing for its operations.

ETFs to Play

Below we highlight a few industrial ETFs which can be used to play the strengthening momentum. All these funds beat SPDR S&P 500 ETF SPY return-wise in the last one month (as of August 26, 2016).

First Trust RBA American Industrial Renaissance ETF AIRR

The fund measures the performance of small-and mid-cap U.S. companies in the industrial and community banking sectors.The U.S. economy came up with several decent-to-upbeat data points recently. Also, since the U.S. consumer comfort index grew to the highest level since April 2015 (as per Bloomberg), there should be sufficient demand for capital goods from the domestic market (read: Industrial Output Posts 20-Month High Gain: 3 ETFs to Buy).

We thus prefer to pick an ETF with a domestic focused ETF. Now, since smaller capitalization stocks are best-suited to capture domestic economic health, AIRR should be an intriguing pick (see all industrials ETFs here).

John Hancock Multifactor Industrials ETF JHMI

The underlying index of the fund picks U.S. industrial stocks based on drivers of expected returns. The fund puts stress on factors like smaller capitalization, lower relative price and higher profitability, which are expected to lead investors to higher expected returns, as per the issuer.

PowerShares S&P Small-Cap Industrials Portfolio ETF PSCI

As the name suggests, the fund gives exposure to small-cap stocks belonging to the U.S. industrial sector.

Industrial Innovation ETF ARKQ

This ETF seeks long-term capital appreciation by investing in companies that benefit from the development of new products or services, technological improvements in scientific research.

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