U.S. Manufacturing PMI Falls: ETFs In Focus

The United States manufacturing represented by an IHS Markit survey fell to a two-month low. Markit stated in a preliminary report that U.S. manufacturing activity declined to 52.5 in August compared with 53.3 in July. A figure above 50 indicates expansion.

Moreover, the manufacturing output index fell to 52.2 in August from 54.1 in July. However, the composite output index increased to 56 from 54.6 in July, primarily driven by an improvement in services business activity, as the index increased to 56.9 from 54.7 in July.

Given the strong dependence of American manufacturers on overseas customers, a weaker dollar coupled with strong global growth bode well for the U.S. manufacturing sector, as goods were cheaper for international customers. Moreover, the negative manufacturing data led to a decline in the greenback.

Although, consumer confidence in the country is strong, there is increased political uncertainty.

Moreover, despite rumors of developments being made in the tax reform plan by President Donald Trump’s administration, his Charlottesville comments, where he stated that both sides were to blame in the protests, was a negative for his approval rating.

Also, Trump’s most-recent comment in a rally in Arizona, where he stated that his willingness to shut down the federal government to secure funding for the border wall, has given birth to a new fear in the market.

However, a positive for manufacturing companies is Trump’s most-recent activity, where he launched an investigation into if China is violating international trade laws relating to intellectual property rights. American businesses operating in China are forced to hand over key technological advances to China, while operating their businesses abroad.

The White House triggered section 301 of the Trade Act of 1974. This section specifically forces foreign countries to open up their markets to the United States exporters. It allows the United States to impose tariffs on imported goods from a foreign country or restrict access to domestic markets for goods from that country. Although the investigation would take more than a year, it marks the beginning of a potential trade war among the two countries.

Let us now discuss a few ETFs focused on providing exposure to U.S. Industrial equities.

Industrial Select Sector SPDR Fund XLI

This fund is one of the most popular United States equity ETFs and focuses on providing exposure to the U.S. industrial sector.

It has AUM of $11.81 billion and charges a fee of 14 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Machinery take the top three spots, with 23.23%, 19.38% and 16.72% allocation, respectively (as of June 30, 2017). From an individual holdings perspective, the fund has high exposure to General Electric (NYSE:GE) , Boeing Co (NYSE:BA) and 3M Co (NYSE:MMM) with 7.11%, 6.31% and 5.62% allocation, respectively (as of August 23, 2017). The fund has returned 14.53% in the last one year and 8.31% year to date (as of August 23, 2017). XLI currently has a Zacks ETF Rank 3 (Hold) with a Medium risk outlook (read: ETFs in Focus Post General Electric Q2 Earnings).

Vanguard Industrials ETF (MC:VIS)

This fund has AUM of $3.4 billion and charges a fee of 10 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Industrial Machinery take the top three spots, with 21.5%, 17.2% and 10.6% allocation, respectively (as of July 31, 2017). From an individual holdings perspective, the fund has high exposure to General Electric, Boeing Co and 3M Co with 8.1%, 5.1% and 4.4% allocation, respectively (as of July 31, 2017). The fund has returned 13.68% in the last one year and 6.81% year to date (as of August 23, 2017). VIS currently has a Zacks ETF Rank 3 with a Medium risk outlook (read: US Industrial Production Misses Expectations: ETFs in Focus).

iShares U.S. Industrials ETF IYJ

This ETF is a relatively costly bet on the U.S. industrial sector.

It has AUM of $931.79 million and charges a fee of 44 basis points a year. From a sector look, Capital Goods, Software & Services and Transportation take the top three spots, with 58.60%, 12.75% and 12.26% allocation, respectively (as of August 22, 2017). From an individual holdings perspective, the fund has high exposure to General Electric, Boeing Co and 3M Co with 7.11%, 4.47% and 4.08% allocation, respectively (as of August 22, 2017). The fund has returned 14.88% in the last one year and 9.55% year to date (as of August 23, 2017). IYJ currently has a Zacks ETF Rank 3 with a Medium risk outlook.

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