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Is it the Right Time to Bet on Industrial ETFs? Let's Explore

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The industrial sector, which took a hit from the disruption of global supply chains and the shutdown of factories, is expected to rebound as the economy reopens and the economic outlook improves. Moreover, the third quarter has witnessed U.S. manufacturing activity rising to a nearly two-year high in August owing to solid new orders.  

In such a scenario, the industrial sector seems to be sizzling with investment opportunities. Let’s look at some factors supporting the sector:

Encouraging Manufacturing Data

Per the Institute for Supply Management’s (ISM) Sep 1 statement, the index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. Economists polled by Reuters forecast a rise in the index to 54.5 in August.

Moreover, the Commerce Department recently reported that new orders for U.S. manufactured goods rose for the third consecutive month in July by 6.4%. The uptick in July not only beat the consensus estimate of 5.6% but also matched the upwardly revised spike in June. The report also showed that factory orders for durable goods continued the upward movement, rising 11.4% in July compared with the 7.7% rise in the previous month. In fact, the third consecutive monthly jump was led by an increase in orders for transportation equipment that were up 35.6% from the prior month. Furthermore, orders for non-durable goods and shipments of manufactured goods rose 1.8% and 4.6%, respectively, in July.

Improving Economic Outlook

Notably, reports of a spike in new coronavirus cases across the United States seem to subside a bit, buoying investors’ enthusiasm. Also, encouraging data indicating that the U.S. economy is gradually returning to the pre-pandemic level will add to the strength. In fact, the latest jobs data, which showed that the economy added 1.4 million jobs in August and unemployment rate dropped to 8.4% from 10.2%, is an indication of an improving economy. Encouragingly, about half the jobs that were lost during the pandemic have been recovered.

Commitment to Phase 1 Trade Deal

The latest progress in U.S.-China trade talks has injected optimism into markets. Ending speculations and concerns over simmering tensions between the two large economies, trade officials have reaffirmed their commitment to the Phase 1 trade deal. Notably, the pledge was made between US Trade Representative Robert Lighthizer, US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He on a phone call, which was previously expected on Aug 15. In this regard, US Trade Representative's office (USTR) said that, "both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement," per a Reuters article. 

China has committed to purchases for the industrial sector that include steam turbines, nuclear reactors, refrigerators, insulated wire, antibiotics as well as iron and steel products. With both the countries’ commitment to the trade deal, the industrial sector is likely to see an uptick in demand.

Fed’s Support

Also, with support from the central bank and hopes of a further stimulus by the Congress, the industrial sector is expected to fare well in the near term. Moreover, the central bank recently announced a new strategy to revive the full-employment scenario to its pre-COVID levels in the United States and drive inflation back to a decent degree. Under the new scheme, the Fed will try and achieve inflation at 2%, on average, mitigating the below-2% phase with higher inflation "for some time." The change in the Fed’s tone suggests that its key overnight interest rate will remain at rock bottom in the medium term as the central bank is striving to drive inflation.

Industrial ETFs That Can Gain

Against this backdrop, investors can still keep a tab on the following ETFs (see all industrial ETFs here):

The Industrial Select Sector SPDR Fund (XLI - Free Report)

The fund tracks the Industrial Select Sector Index (read: Don't Fear Correction: ETF Laggards Are Emerging Leaders).

AUM: $11.71 billion

Expense Ratio: 0.13%

Vanguard Industrials ETF (VIS - Free Report)

The fund tracks the MSCI US Investable Market Industrials 25/50 index (read: ETF Areas to Consider This Cursed September Amid Coronavirus).

AUM: $3.08 billion

Expense Ratio: 0.10%

iShares U.S. Industrials ETF (IYJ - Free Report)

The fund tracks the Dow Jones U.S. Industrials Index (read: ETFs to Gain as U.S. Business Activity Touches 18-Month High).

AUM: $877.3 million

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF (FIDU - Free Report)

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $390.9 million

Expense Ratio: 0.08%

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