Will ETFs Gain on US Industrial Output Rise in October?

The latest data on U.S. industrial output appears to be encouraging as recoveries from the damages caused by Hurricane Ida are apparent. Per the Fed’s recently-released data, total industrial production increased 1.6% in October after declining about 1.3% in September. There was a 1.2% rise in manufacturing output (hitting its highest level since March 2019). Going on, there was a 1.2% uptick in utility production and a 4.1% upside in mining production.

– Zacks

Considering the latest positive data releases, investors can track ETFs like The Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF (VIS), Fidelity MSCI Industrials Index ETF (FIDU) and iShares U.S. Industrials ETF (IYJ), which can ride the optimism.

Total industrial production increased 5.1% from the year-ago figure in October. The metric also witnessed its highest reading since December 2019. According to the Fed’s report, the durable and the nondurable manufacturing indexes rose 1.3%. Meanwhile, the index for other manufacturing (publishing and logging) slipped 1.5% in October.

Going on, capacity utilization for the industrial sector increased 1.2% in October to 76.4%. The manufacturing capacity utilization for the industry, which is the measure for studying how efficiently firms are utilizing their resources, jumped 0.9% in October to 76.7% (witnessing the highest rate since January 2019), per the Fed’s report.

Present U.S. Economic Scenario

Investors have started worrying about the hot inflation data releases amid the Fed’s stance of calling inflation levels ‘transitory’. Per the latest Labor Department report, the Consumer Price Index (CPI) in October rose 6.2% year over year compared to the Dow Jones estimate of a 5.9% rise, per a CNBC article. The metric came in at the highest level since December 1990 and covers a basket of products ranging from gasoline and health care to groceries and rents. It also increased 0.9% for the month, surpassing the 0.6% Dow Jones estimate. The soaring food, used vehicles and energy prices might be primarily responsible for the rising inflation levels.

According to the Federal Reserve, a major part of the inflation has been triggered by the pandemic-driven supply-demand imbalance, which might get resolved in a few months (per a CNBC article).

However, the impressive third-quarter earnings results have been keeping investors busy. The earnings results have also eased investors‘ worries surrounding the rising supply-chain disturbances eroding corporate profit margins. The upside in the market has also been driven by the much-anticipated announcements from the Federal Reserve. The central bank has informed about its plan to initiate the tapering of bond purchases “later this month” (according to a CNBC article).

In another encouraging development, the retail sales data came out to be remarkable. The metric rose 1.7% in October (the largest surge since March), beating economists’ estimate of a 1.4% rise. This, in turn, marks a 16.3% increase from the year-ago figure (according to a Reuters article). The metric rose for the third consecutive month. Online sales surged 10.2% from the year-ago level.

Highlighting another positive development, the U.S. jobs report for November seems very impressive. The nonfarm payrolls rose by 531,000 in October, surpassing the estimate of 450,000, per a CNBC article. Also, beating expectations, the unemployment rate declined to 4.6%, hitting a new pandemic low level (according to a CNBC article).

Wall Street has another reason to cheer as President Joe Biden has signed the more than $1-trillion infrastructure bill. The legislation was approved in the U.S. House of Representatives in a 228-206 vote on Nov 5.

Going on, the Atlanta Fed stated that the U.S. economy will grow 8.2% in fourth-quarter 2021 in his latest forecasts on Nov 10. This marks an improvement from the previous expectation of 6.6% on Oct 29. Heading into the holiday season, given the reopening of domestic and international borders for traveling, we are enthusiastic about U.S. economic growth.

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs that have relatively high exposure to industrial companies:

The Industrial Select Sector SPDR Fund XLI           

The Industrial Select Sector SPDR Fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. The fund seeks to provide precise exposure to companies in the following industries: aerospace and defense; industrial conglomerates; marine; transportation infrastructure; machinery; road and rail; air freight and logistics; commercial services and supplies; professional services; electrical equipment; construction and engineering; trading companies and distributors; airlines; and building products.

The Industrial Select Sector SPDR Fund has AUM of $18.39 billion and its expense ratio is 0.12%. The Industrial Select Sector SPDR Fund carries a Zacks ETF Rank #1 (Strong Buy) with a Medium-risk outlook (read: Wall Street Still Has Room to Run: ETFs to Play).

Vanguard Industrials ETF VIS                   

Vanguard Industrials ETF offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index.

Vanguard Industrials ETF manages an AUM of $5.32 billion and its expense ratio is 0.10%. Vanguard Industrials ETF sports a Zacks ETF Rank #1 with a Medium-risk outlook (read: Will ETFs Suffer as US Manufacturing Slows Down in October?).

Fidelity MSCI Industrials Index ETF FIDU

The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index.

Fidelity MSCI Industrials Index ETF has AUM of $876.4 million and its expense ratio, 0.08%. Fidelity MSCI Industrials Index ETF carries a Zacks ETF Rank #2 (Buy) with a Medium-risk outlook.

iShares U.S. Industrials ETF IYJ

The iShares U.S. Industrials ETF seeks to track the investment results of the Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index.

iShares U.S. Industrials ETF has AUM of $1.68 billion and its expense ratio is 0.41%, as stated in the prospectus. IYJ carries a Zacks ETF Rank #2 with a Medium-risk outlook (read: PayPal Plunges on Weak Guidance: ETFs in Focus).

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Vanguard Industrials ETF (VIS): ETF Research Reports
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
Fidelity MSCI Industrials Index ETF (FIDU): ETF Research Reports
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