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U.S. Manufacturing PMI Strong: ETFs in Focus

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Manufacturers in the United States witnessed a solid start to 2018, per data released by IHS Markit. The Flash Purchasing Managers' Index (PMI) survey showed that production volumes and new orders have been reporting robust growth. Moreover, strong export growth has also been supporting manufacturers in the United States.

Into the Headlines

United States Flash Manufacturing PMI increased to 55.5 in January compared with 55.1 in December. A reading above 50 indicates expansion. Coming to drivers of manufacturing growth, IHS Markit Flash U.S. Manufacturing Output Index increased to 56.2 in January compared with 55.9 in December, a 12-month high.

Chris Williamson, chief business economist at IHS Markit, said, "January saw an encouraging start to the year for the US economy. Business activity across the manufacturing and service sectors continued to expand, driving further job gains as companies expanded capacity. Manufacturing is faring especially well, in part thanks to the weaker dollar, providing an important spur to the economy at the start of the year."

Given the excessive dependence of American manufacturers on overseas customers, a weaker dollar coupled with strong global growth bode well for the U.S. manufacturing sector, as goods were cheaper for international customers. PowerShares DB US Dollar Bullish ETF UUP is down 2.1% so far this year and has declined 9.2% in a year.

Economic Scenario

Coming to the economic data, United States’ GDP grew 3.2% in the third quarter compared with 3.1% in the previous quarter. Although the third quarter reading was below market expectations of 3.3%, it was the highest since first quarter 2015. Moreover, per the Federal Reserve, industrial production in the United States increased 0.9% in December against a decline of 0.1% in the prior month (read: US Industrial Production Beats Expectations: ETFs in Focus).  

Let us now discuss a few ETFs focused on providing exposure to U.S. Industrial equities.

Industrial Select Sector SPDR Fund XLI

This fund is one of the most popular United States equity ETFs and focuses on providing exposure to the U.S. industrial sector.

It has AUM of $15.8 billion and charges a fee of 14 basis points a year. From a sector look, Aerospace & Defense , Machinery and Industrial Conglomerates take the top three spots, with 25.7%, 18.3% and 16.3% allocation, respectively (as of Dec 31, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co BA, 3M Co MMM and Honeywell Inc HON with 7.5%, 5.8% and 4.9% allocation, respectively (as of Jan 24, 2018). The fund has returned 27.4% in a year. XLI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Industrials ETF VIS

This fund has AUM of $3.9 billion and charges a fee of 10 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Industrial Machinery take the top three spots, with 22.3%, 14.4% and 11.0% allocation, respectively (as of Dec 31, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co, General Electric GE and 3M Co with 5.4%, 5.0% and 4.6% allocation, respectively (as of Dec 31, 2017). The fund has returned 24.8% in a year. VIS currently has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Industrials ETF IYJ

This ETF is a relatively costly bet on the U.S. industrial sector.

It has AUM of $1.3 billion and charges a fee of 44 basis points a year. From a sector look, Capital Goods, Software & Services and Transportation take the top three spots, with 58.39%, 12.75% and 12.19% allocation, respectively (as of September 1, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co, 3M Co and General Electric, with 5.2%, 4.1% and 4.1% allocation, respectively (as of Jan 23, 2018). The fund has returned 27.9% in a year. IYJ currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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Boeing Company (The) (BA) : Free Stock Analysis Report
 
3M Company (MMM) : Free Stock Analysis Report
 
Honeywell International Inc. (HON) : Free Stock Analysis Report
 
General Electric Company (GE) : Free Stock Analysis Report
 
VIPERS-INDUS (VIS): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
ISHARS-US INDU (IYJ): ETF Research Reports
 
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