With the broader market picking up steam, capital goods and the
manufacturing sector in the U.S. are once again under the
spotlight. Lately, the sector came up with the
US Manufacturing Activity on the Upswing
Manufacturing index grew 0.9% sequentially in November 2013 to
57.3% as per the
, for the sixth successive month. The month's PMI reading was the
highest almost in two years. The data breezed past the market
expectation which called for a slowdown in
Out of the 18 manufacturing industries, 15 actually reported growth
in November. Industrial production, new orders and employment have
all been rising at a solid clip. Higher order backlog, improving
exports and slowing supplier deliveries point to an enhanced
business environment (read:
3 ETFs for Manufacturing "Renaissance
Behind This Uptrend
We remain optimistic on the sector as a whole. The financial
management and advisory firm - Merrill Lynch - is also
supportive of our view
and upgraded the sector to Outperform earlier this year.
Let's dig a little deeper and take a look at the drivers of this
Domestic Economy Remains on Track:
The U.S. economy has now come a long way from the meltdown that
occurred five years back. All economic indicators are improving, be
it housing, job or consumer confidence data, from the pre-crisis
level. In a nutshell, improved domestic demand for industrial
equipment and better performance by the airline, railroads and
shipping companies are leading the space higher.
Reduced Wage Differential
& Lower Energy Prices
As per Merrill Lynch, a tapering wage difference between the U.S.
and emerging nations, still-low inflation rate and a weaker dollar
as compared to its historic level are shoring up the U.S.
manufacturing industry (Read:
Can U.S. Manufacturing Industries Keep
). Lower energy prices are also contributing massively to the
sector. Also, the firm expects "business spending to grow 3x faster
than consumer spending by early next year".
Rebound in Europe and China:
European revival also contributed to the industrial growth in the
U.S. After a rough patch thanks to sovereign debt issues, high
unemployment and stagnant growth, the European economy has finally
entered into the zone of recovery which led to increased
The world's second largest economy - China - is also showing a
pickup from a short-term slowdown which in turn bolstered the
import profile of the country thus giving optimistic cues to the
U.S. manufacturing industry. In short, the Chinese revival is
helping in the U.S. export resurgence to some extent.
There are hardly any U.S.-based industrial ETFs which have not
returned at least 30% in the year-to-date time frame (as of
December 2, 2013). Funds discussed below offer targeted bets on the
sector and tapping of these funds can help investors garner profits
if confidence in the bloc continues to rise.
Industrials/Producer Durables AlphaDEX Fund
This fund follows the StrataQuant Industrials Index which is based
on the AlphaDEX stock picking methodology. In spite of focusing
just on the market cap this technique closely monitors the stocks'
price appreciation/momentum, sales and earnings growth as well as
value factors and ranks accordingly.
The ETF has managed assets worth $555.4 million. In total, the
product holds 101 securities, which are not at all concentrated on
its top 10 holdings. Not a single company accounts for more than
1.89% of the basket. The almost equal-weighted strategy eases out
the risk quotient of the fund. Investors have to pay 70 bps in fees
and expenses which is higher than the average expenses charged by
the industrial equities ETF.
FXR gained an impressive 40.7% so far this year (as of December 2).
The product has a Zacks Rank of 1 or 'Strong Buy' rating with a
'Medium' risk outlook.
PowerShares Dynamic Industrials
This ETF tracks the Dynamic Industrials Sector Intellidex Index,
giving investors exposure to 60 U.S. industrial companies. The fund
holds about 61 securities in its basket with AUM of $117.2 million
while charging a slightly higher fee of 60 bps per year from
Like FXR, PRN also includes stocks with higher fundamental growth,
compelling valuation, and lower risk factors. Securities shown to
possess the greatest capital appreciation potential are selected by
This product also does not call for concentration risk with
one-fourth of the total occupying the top-10 share. The fund added
46.32% so far in 2013. The product has a Zacks ETF Rank of 2 or
'Buy' with a 'Low' risk outlook.
Guggenheim S&P 500 Equal Weight Industrials
Yet another enticing but overlooked option is RGI. The fund seeks
to track the performance of the S&P 500 Equal Weight Index
Industrials. So far, the fund has amassed as asset base of $67.1
In terms of performance, RGI is up about 33.0% year to date.
Moreover, RGI is the cheapest among the three, charging just 50
basis points a year. It could thus be an interesting choice for
those seeking to keep total fees low.
Being an equal-weight product, RGI has a lower 'risk' outlook while
it carries a Zacks Rank #2 (Buy).
On the flip side, this bullish data once again renewed the taper
concerns due to which the funds might falter in the near term
reflecting broader market volatility. The prospect of trimming
stimulus will likely boost the dollar which, in turn, will make
imports from the U.S. costlier. But we believe that the sector has
already priced in such issues and the domestic pent-up demand will
be well enough to sustain the momentum.
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FT-INDL/PROD (FXR): ETF Research Reports
PWRSH-DYN INDU (PRN): ETF Research Reports
GUGG-SP5 EW IND (RGI): ETF Research Reports
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