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Play the Manufacturing Boom with this Top-Ranked ETF - ETF News And Commentary

The bell of recovery rang for the U.S. industrial sector in 2013 and barring some short spells, it continues to resonate this year also. Lower energy prices in the U.S., improving technology and rising labor costs in developing economies are paving way for this sector's growth lately.

Though the sector had a weak start in 2014 thanks to a colder-than-usual winter in the U.S. that hurt production and demand, it started improving with the passage of a harsh winter. The second quarter of 2014 was the strongest quarter in almost four years in terms of industrial production (read: 3 ETFs to Profit from the Manufacturing Upswing ).

Industrial production grew at an annualized rate of 5.0% in July in the U.S. with factory output growing at the best speed in five months . Bookings for business equipment led the way higher for the U.S. industrial sector. Also, economic stabilization in China and further easy money policies in Europe contributed to the export demand.

That's not all the sector is riding out. Previously, it was widely believed that North America and Western Europe are high-cost nations while Latin America, Eastern Europe, and most of Asia - especially China - are low cost destinations. This concept propelled offshoring activities.

However, the rising wages in emerging countries and sluggish rise in hourly wages in developed nations have gradually been filling the gap giving way to the trend of 'reshoring' - the return of manufacturing hubs to the U.S. and other developed markets (read: Why Mexico ETF is a Long-term Winner ).

Investors should note that, industrial production is somewhat susceptible to interest rates and consumer demand. The sector is moderately capital intensive and requires borrowings to fund its operation. Since the monetary policy is still accommodative in the U.S. and interest rates are at considerably low levels, the sector seems likely to sustain its winning spree in the near term.

This calls for a play in the U.S. industrial space in the weeks ahead. To do this, investors can look at the Zacks ETF Rank and find the top ETFs in said sector.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center ) .

For investors seeking to apply this methodology to their portfolio in the industrial sector, we have taken a closer look at the top ranked FXR , which has a Zacks ETF Rank of 1 or Strong Buy with a Medium risk tolerance level. The details are highlighted below (see: all Top-Ranked ETFs here ):

FXR in Focus

FXR looks to track the StrataQuant Industrials Index, a benchmark that holds roughly 105 industrial stocks in its basket and uses a modified equal weight approach. To be included, firms must have stood out on a variety of growth and value factors, including price appreciation, book value to price, and ROA, among others. Then, the ETF eliminates the 25% bottom-rated stocks and then divides the rest into quintiles, equally weighting within each quintile, but giving more assets to the higher ranked groups.

This methodology produces an ETF which has amassed about $862 million in assets, charging investors 70 basis points a year in fees. Exposure is quite spread out though, as no single company accounts for more than 2.18% of the total.

The industrial ETF does have a bit of a concentration in certain industries though, as machinery (24.5%), aerospace and defense (13.7%), and commercial services & supplies (9.3%) take the top three spots. The product is light on electrical equipment, professional services and air freight & logistics.

While this is both an outperforming and liquid pick in the sector, the choice is not a cheap choice. The product charges an expense ratio of 70 bps in fees, much higher than the average expense ratio charged by the industrial equities ETF space (read: New American Industrial Renaissance ETF Hits the Market ).

However, the volume is generally above 600,000 shares a day. This will tighten bid ask spreads resulting in lower trading costs. The ETF is a nice mix of growth and value stocks while having exposure across various capitalization levels.

Though the fund is governed by U.S. stocks, a little share of it is invested in Latin America and Europe. The ETF has been a great pick as of late as it has beaten out all its U.S. industrial brethren in the year-to-date frame (as of August 15, 2014). This suggests that FXR could be a solid selection for investors seeking quality exposure to the U.S. industrial boom.

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FT-INDL/PROD (FXR): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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