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Industrial ETFs to Gain on Improving US Manufacturing Output

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The latest update on U.S. manufacturing output looks encouraging despite the rising coronavirus cases. The metric has increased for the sixth straight month as factories begin to rebound from the slump during the coronavirus-led lockdown in March. Going by the Federal Reserve’s recently-released data, factory output rose 1% month over month, following an upwardly revised 0.1% increase in September, per a BloombergQuint article. The metric was on par with the median forecast, per a Bloomberg survey of economists. Moreover, total industrial production, including output at factories, mines and utilities, rose 1.1% in October, after declining 0.4% in September.

Excluding auto production, there was a 1.1% rise in factory output. However, October was the third consecutive month of falling output in case of motor vehicle and parts. Meanwhile, there was a 3.9% rise in utility output led by rise in electricity demand, which had offset the decline in natural gas production. Notably, following a 1.2% increase in the prior month, mining output declined 0.6% in October.

Going on, in October, manufacturing capacity utilization for the industry, the gauge for studying how efficiently firms are utilizing their resources, was at 71.7%, up from 71% in September, per the Fed’s report. Moreover, total capacity utilization, including factories, mines and utilities, rose to 72.8% in October from 72% in the prior month. However, the overall plant-use rate is well behind the February’s 76.9% despite improvements, per a BloombergQuint article.

The increasing factory output in October was led by rising production levels of consumer goods, business equipment and construction supplies amid an environment of steady demand and thin inventories, per a BloombergQuint article. However, supply chain disturbances and cutbacks in capital investments continue to remain a concern for the industry, per the same article.

Factors to Keep Driving US Manufacturing Levels

The United States is pleasantly surprising market participants with upbeat economic data. Notably, the world’s largest economy delivered an impressive performance in third-quarter 2020, beating market expectations. Going by the Department of Commerce’s report on Oct 29, the GDP surged to a record high at an annualized pace of 33.1% after declining 31.4% in the second quarter.

Another report has also been highlighting that the manufacturing sector is also picking up despite the coronavirus crisis. According to the Institute for Supply Management (ISM) report on Nov 2, its Purchasing Managers' Index (PMI) for manufacturing surged to 59.3% in October, increasing 3.4 points from the last month and surpassing the consensus estimate of 55.9%. In fact, the October figure also stood out as the highest PMI reading since September 2018.

Furthermore, the housing market continues to be a bright spot in the U.S. economy as it recently delivered a streak of encouraging data.

The worsening coronavirus crisis is therefore increasing desperation among investors over the introduction of a vaccine. In such a scenario, the recent progress in the coronavirus antibody and vaccine development makes it appear that we might be able to combat the health crisis.

Moreover, the chances of a divided Congress in the United States seem more likely, where Republicans can continue to control the Senate and Democrats, the House. Thus, as a result of this political gridlock, major and stringent changes in the corporate tax policies will be very difficult to implement in the medium-term. Thus, easing worries regarding major policy changes are making the environment more friendly for industrial production.

Industrial ETFs to Shine

Against this backdrop, investors can still keep a tab of 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: ETF Strategies to Play as Vaccine Hopes Firm With Moderna Data).

AUM: $14.45 billion

Expense Ratio: 0.13%

Vanguard Industrials ETF (VIS - Free Report)

The fund tracks the MSCI US Investable Market Industrials 25/50 index (read: Can Industrial ETFs Gain Despite Mixed Q3 Earnings?).

AUM: $3.55 billion

Expense Ratio: 0.10%

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

The fund tracks the Dow Jones U.S. Industrials Index (read: PayPal Q3 Earnings Impress Investors: ETFs to Win).

AUM: $1.08 billion

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF (FIDU - Free Report)

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $478.2 million

Expense Ratio: 0.08%

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