U.S. factory production in April grew 0.5%, bringing cheer to manufacturing units that were desperately looking for revival. Most of the core industries have done relatively well as compared to February and March. In April, the Automotive sector could not perform well on account of a massive delay in supplies and piling up of inventories.
Apart from a decline in the automobile sector, the gain in factory output was broad-based. There were multiple categories that posted an increase of greater than 1% growth like machinery, computer and electronic products, electrical equipment and aerospace. As compared to March, when the factory-use rate was 75.5%, April has shown improvement to 75.8%. This shows that consumer spending will be a major contributor to economic growth in the second quarter of the year (Read: 3 ETFs Likely to Stay Strong Even as Manufacturing Slows ).
Production of industrial machinery increased by 2.3% in April, utility output went up by 1.9%, mining shot up by 1.1%, oil and gas drilling by 3%, while the automobile sector saw a dip of 1.3% after continuously gaining for two months. As the domestic as well as global economy are looking up, the industrial outlook is slowly turning positive.
Due to the trade policy of the Trump administration there is also a palpable fear among most U.S. production firms which have an international presence, particularly in China. Tariff on imported steel and aluminum by the U.S. government has pushed up the commodities' prices. Also, relations with the EU are strained now with regard to Trumps decision to pull out of the Iran nuclear deal. Due to the fear of a trade war, long-term planning has come to a standstill and is one of the reasons for the slowdown in their auto market. Initially, the U.S. administration has decided to put a 2.5% tariff on European imported popular cars like BMW, Mercedes Benz, Porsche and Audi but it was not implemented. Even then, inventories have increased and auto-makers are perplexed about retaliatory business policies that are jeopardizing their growth prospect.
The housing sector saw a sharp decline of 3.7%, against a seasonally adjusted rate of 1.287 million units a year. Builders are of the opinion that the cost of lumbers has increased phenomenally and with an increased cost of manufacturing, new firms are not willing to explore the market any more. Also, the construction industry has not been able to hire sufficient workers and building materials' prices have increased manifold. At this juncture, most builders are waiting for a short-term interest rate hike from the Fed which they believe would help in a pull-back. This would help the construction firms in reducing the payback time from suppliers and consumers, thereby improving the operational cash flow for firms.
Industrial ETFs in focus
In the above context, let us look at some of the popular ETFs.
Industrial Select Sector SPDR Fund ( XLI )
The fund closely tracks the returns and characteristics of the Industrial Select Sector Index. It has a fee of 13 basis points annually and has an asset base $12.65 billion which is the highest among industrial funds. It is composed of 70 stocks and has an average daily volume of trade of 13 million. In terms of holdings, Boeing Co (BA 8.2%), General Electric Co (5.7%) and 3M Co (MMM 5.2%) are the top three stocks. Aerospace & Defense (28.4%), Industrial Conglomerates (16.8%) and Machinery (16.5%) are the top three industry exposures for this fund. XLI has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Vanguard Industrial ETF ( VIS )
This is a passively managed ETF which seeks to track the investment return of stocks MSCI US Investable Market Index (IMI)/Industrials 25/50. The fund has 346 holdings with 149,000 volume of stocks traded on a daily basis. It has an expense ratio of 0.10% and is dominated by the Aerospace and Defense industry with 24.3% control followed by Industrial Conglomerates (13%) and Industrial Machinery (10.5%). The fund, with AUM of $3.5 billion, has a Zacks ETF Rank #1 with a Medium risk outlook.
First Trust Industrials/Producer Durables AlphaDEX Fund ( FXR )
The fund tracks the Strata Quant Industrials Index and has 94 stocks in its portfolio. With an AUM of $1.5 billion, FXR has an average daily trade volume of 152,400. From a sector perspective, Machinery (16.5%), Road and Rail (14.7%), Aerospace and Defense (12.4%) and Airlines (10.1%) are the top four allocations of the fund. Individually, none of the stocks holds more than 2.1% with CSX Corporation (CSX) leading the list. It charges an annual fee of 63 basis points and has a Zacks ETF Rank #1 with a Medium risk outlook (read: What Pushed Industrial ETFs Down Despite Upbeat Earnings ?).
iShares U.S. Industrials ETF ( IYJ )
This fund tracks the Dow Jones US Industrial Index and has a good exposure to companies producing goods for manufacturing and construction in United States. With 208 funds, IYJ has assets worth $1.06 billion and has a daily trade volume of 75,000. With an expense ratio of 0.44% this fund is mainly controlled by capital goods, software and services and transportation in the proportion of 56.4%, 14.7% and 12.8%, respectively. Individually, Boeing has 5.6% of the holdings with others holding less than 3.9% of the portfolio. IYJ has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Fidelity MSCI Industrials Index ETF ( FIDU )
The fund provides investment results of the performance of MSCI USA IMI Industrials Index. It has AUM of $508 million and is quite cheap with annual fees of 8 basis points. It has 342 stocks in its basket with average daily trade of 165,700 shares. In terms of sector exposure, Aerospace and Defense industry (24.8%), Machinery (18.8%), Industrial Conglomerates (13.6%) are the top allocations in this fund. Boeing has the largest stake with 6.7%, while others control less than 4.5% each. FIDU has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (Read: Should You Invest in the Fidelity MSCI Industrials Index ETF ?).
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