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Will Industrial ETFs Make Good Bets? Let's Find Out

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The industrial sector has been attracting investor attention as the gradual reopening of U.S. and global economies highlights brighter prospects. The S&P 500 Industrials index has already returned 29.3% in the past year compared with the S&P 500’s 28.9% rise.

The latest ISM Manufacturing Purchasing Managers' Index (PMI) data for the United States paints a rosy picture for the industrial sector. The metric rose to 61.1% in September from 59.9% in August and surpassed forecasts of a decrease to 59.6, per a Reuters article. Any reading above 50% indicates expansion in U.S. manufacturing activities. Notably, the manufacturing sector, which makes up 12% of the U.S. economy, saw the reading rise forthe 16th consecutive month. 17 out of 18 manufacturing industries witnessed growth in September. The New Orders Index remained flat at 66.7%. The Supplier Deliveries Index reading was 73.4%, increasing 3.9 percentage points from the August figure.

In another positive development, optimism surrounding the news highlighting positive updates on Merck (MRK) and Ridgeback Biotherapeutics’ investigational oral antiviral medicine, molnupiravir, can support the sector. The update supports the spaces, which are expected to gain from the reopening of economies as the molnupiravir will help fight against COVID-19, if approved by the FDA.

Going on, U.S. consumer sentiment marginally improved despite rising concerns about coronavirus cases and inflation levels. The University of Michigan’s preliminary consumer sentiment inched up to 71 in September from 70.3 last month, per a BloombergQuint article.

The strength in consumer sentiment can be the primary driving force behind the solid performance by the consumer discretionary space as consumers are expected to splurge this holiday season after being restricted for more than a year.

The retail sales data has surprised investors pleasantly. According to a CNBC article, the metric inched up 0.7% sequentially in August 2021 against market expectations of a 0.8% decline. According to the Reuters article, online retail sales rose 5.3% last month after dropping 4.6% in July. There was an increase in clothing sales and building material and furniture.

The progress in coronavirus vaccine rollout presents a strong case in favor of a faster return to normalcy and economic recovery. The FDA has approved emergency use of a booster dose of the Pfizer Inc. (PFE) and BioNTech SE (BNTX) COVID-19 vaccine. President Joe Biden has also outlined an effective plan to accelerate the vaccination rate and control the coronavirus 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 running weekly tests.

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs that can gain from the growing optimism on the reopening U.S. economy:

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 $17.37 billion and expense ratio is 0.12% (read: Fed Plans QE Taper: Time for Cyclical Sector ETFs?).

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 $5.10 billion and expense ratio is 0.10% (read: Will ETFs Suffer as US Industrial Output Falls in 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 $819.6 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 Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index. Its AUM is $1.60 billion and expense ratio is 0.41%, as stated in the prospectus.

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