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Will ETFs Suffer as US Industrial Output Falls in August?

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The latest update on U.S. industrial output looks disappointing as the damages from Hurricane Ida and the ongoing health crisis took a toll on the metric. The consistent crunch in raw material supplies and labor as a result of the pandemic has been a serious concern. Per the Fed’s recently-released data, total industrial production rose 0.4% in August against an increase of 0.8% in July.

There was a 0.2% rise in manufacturing output despite the constrained supply of semiconductors and hurricane-induced temporary plant shutdowns for petrochemicals, plastic resins, and petroleum refining. Going on, there was a 3.3% increase in utilities production as very warm weather conditions drove demand for air conditioning. However, there was a 0.6% decline in mining production.

Going on, capacity utilization for the industrial sector increased 0.2% in August to 76.4%. The manufacturing capacity utilization for the industry, which is the measure for studying how efficiently firms are utilizing their resources, rose 0.1% in August to 76.7%, per the Fed’s report.

Present U.S. Economic Scenario

Investors have their eyes on the minutes from the Fed’s two-day policy meeting that will begin on Sep 21. Fears surrounding the rising inflationary levels have picked up as the producer price index witnessed the largest annual surge since November 2010 (per a CNBC article). The metric rose 0.7% in August and 8.3% year over year. It is being speculated that rising inflation levels may build more pressure on the Fed to tighten the monetary policies.

Several economic data releases are also weighing on investors’ minds. The U.S. economy added only 235,000 jobs in August 2021 (the lowest in seven months). The metric was far behind the forecast of 750,000 as a surge in COVID-19 infections kept companies from hiring and workers from actively looking for a job. Consumer confidence in the United States slipped to a six-month low in August.

There are still certain positive developments that can help stimulate a market rally. President Joe Biden has outlined a very effective plan to increase the vaccination rate and control the outbreak. He has made it mandatory for federal employees to get the COVID-19 vaccination, per a CNBC article. The Biden government will also issue guidelines to the Labor Department for imposing vaccine mandates for employers with more than 100 employees or run weekly tests.

New data from the CDC reflects that the seven-day average of new COVID-19 cases through Sep 10 came in at around 136,000, down from 157,000 average new cases at August-end, according to a CNBC article.

The latest ISM Manufacturing Purchasing Managers' Index (PMI)data for the United States is painting a rosy picture for the industrial sector. The metric rose to 59.9 in August from 59.5 in July and surpassed forecasts of 58.6, per a Reuters article. Any reading above 50% indicates expansion in U.S. manufacturing activities. Notably, the manufacturing sector, which makes up 11.9% of the U.S. economy, saw the reading witnessingthe 15th consecutive month of growth.

Industrial ETFs in Focus

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

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

The fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. Its AUM is $17.97 billion and expense ratio is 0.12% (read: Winning ETF Areas Amid Downbeat August Jobs Data).

Vanguard Industrials ETF (VIS - Free Report)                   

This fund offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. Its AUM is $5.25 billion and expense ratio is 0.10% (read: Will ETFs Gain on Upbeat US Manufacturing Data for August?).

Fidelity MSCI Industrials Index ETF (FIDU - Free Report)

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. Its AUM is $842.2 million and expense ratio, 0.08%.

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

The iShares U.S. Industrials ETF seeks to track the investment results of the Dow Jones U.S. Industrials Index. Its AUM is $1.67 billion and expense ratio is 0.41%, as stated in the prospectus.