The U.S. manufacturing sector has been resilient despite lingering inflationary pressures, supported by strong demand for manufactured goods after a prolonged period of weakness. So far, this year has marked a turnaround for the industry. Following a strong first quarter, manufacturing maintained its momentum through the second quarter.
Against this improving backdrop, investors may want to consider funds like Fidelity Select Defense & Aerospace Portfolio FSDAX and Fidelity Select Automotive Portfolio FSAVX that are likely to benefit in the near term.
Industrial Production Expands
U.S. industrial production increased 0.1% in June after posting gains at a similar pace in May, according to the Federal Reserve's report released on Friday. Compared with a year earlier, industrial production rose 1.1% in June. For the second quarter, industrial production advanced 4%.
Manufacturing output was flat in June after edging up 0.1% in May. On an annual basis, manufacturing output climbed 1.1% in June. During the second quarter, manufacturing output surged 4.7%, marking its fastest quarterly growth in five years.
That strong second-quarter performance came after manufacturing output had already risen 1.4% in the first quarter. The sector's momentum has been fueled by continued heavy investment in artificial intelligence, which has strengthened manufacturing activity. Production of computers and peripheral equipment rose 9.2% year over year in June and increased 7.2% during the second quarter.
Motor vehicle and parts production grew 0.7% from the previous month in June. Meanwhile, output of semiconductors and related electronic components increased 0.5% month over month and was up 10.2% compared with the same period last year.
Mining production also improved, rising 0.4% in June after advancing 1.1% in May.
Aggressive AI-related spending by major technology companies has continued to support domestic manufacturing output. Earlier this year, the Federal Reserve had been weighing interest rate hikes after inflation accelerated following the U.S.-Iran conflict that began in late February.
Inflation, however, cooled significantly in June after fighting between the two countries subsided. The consumer price index (CPI) fell 0.4% from the previous month in June after rising 0.5% in May. On an annual basis, CPI eased to 3.5% in June from 4.2% in May. The monthly decline was the steepest since April 2020.
If inflation continues to moderate in the coming months, the Federal Reserve may maintain a wait-and-see approach and move ahead with interest rate cuts. Such a scenario could provide additional support to both the manufacturing sector and the broader U.S. economy.
2 Best Choices
We have, thus, selected two mutual funds with significant exposure to the manufacturing sector, each carrying a Zacks Mutual Fund Rank #2 (Buy), and poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why one should be parking their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Fidelity Select Defense & Aerospace Portfolio fund invests a huge portion of its assets in the securities of companies involved primarily in the research, manufacturing and sale of products and services in the defense or aerospace industries. FSDAX seeks capital growth by investing in both U.S. and non-U.S. companies.
Fidelity Select Defense & Aerospace Portfolio fund has a history of positive total returns for over 10 years. FSDAX has returned 30% and 18.4% over the past three and five years, respectively. The fund has an annual expense ratio of 0.63%, which is lower than the category average.
To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
Fidelity Select Automotive Portfolio fund aims for capital appreciation. FSAVX invests most of its assets in common stocks of companies engaged in manufacturing automobiles, trucks, specialty vehicles, parts, tires and related services.
Fidelity Select Automotive Portfolio fund has a history of positive total returns for over 10 years. FSAVX has returned 6.5% and 1.5% over the past three and five years, respectively. Fidelity Select Automotive Portfolio fund has an expense ratio of 0.78%, which is lower than the category average of 0.92%.
To see how this fund performed compared to its category, and other #1 (Strong Buy) and 2 Ranked Mutual Funds, please click here.
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This article originally published on Zacks Investment Research (zacks.com).
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