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Will Industrial Gain From Improving US Output in March?

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March's encouraging U.S. industrial output data can largely be attributed to the improving labor market and easing pandemic conditions. Per the Fed’s recently-released data, total industrial production rose 0.9% in March. A 0.9% rise in the manufacturing output also looked encouraging. There was a 0.4% rise in utility production. Moreover, mining production witnessed a 1.7% uptick, mainly due to strength in the oil and gas sector.

Considering the latest data release, investors can track ETFs like The Industrial Select Sector SPDR Fund (XLI - Free Report) , Vanguard Industrials ETF (VIS - Free Report) , Fidelity MSCI Industrials Index ETF (FIDU - Free Report) and iShares U.S. Industrials ETF (IYJ - Free Report) , which might gain from an improving industrial output.

Total industrial production increased 5.5% from the year-ago figure in March. According to the Fed’s report, the durable and the nondurable manufacturing indexes rose 1.3% and 0.4%, respectively, in March. The other manufacturing (publishing and logging) index was also up 0.2% in the month.

Capacity utilization for the industrial sector expanded to 78.3% in March. The manufacturing capacity utilization for the industry, which is the measure for studying how efficiently firms are utilizing their resources, increased 0.6% in March to 78.7%, per the Fed’s report.

Present U.S. Economic Scenario

The world’s largest economy is grappling with rising inflation levels. Per the latest Labor Department report, the Consumer Price Index (CPI) jumped 8.5% year over year in March, reaching the highest level since December 1981 (according to a CNBC report). The reading also surpassed the already high Dow Jones estimate of 8.4%. The high inflation level can set the tone for another interest rate hike soon.

The core inflation index, which excludes volatile components such as food and energy prices, rose 6.5% year over year, marking the hottest reading since August 1982 (per a CNBC article).

The recently released FOMC minutes of the March meeting highlighted the central bank’s plans to control the inflation levels by larger interest rate hikes. It also outlined the method and magnitude of reducing the balance sheet holding around $9 trillion in assets. Notably, the Federal Reserve officials have decided to shrink their balance sheet by approximately $95 billion a month. More precisely, the Fed plans to reduce $60 billion in Treasurys and $35 billion in mortgage-backed securities, phasing in over three months, starting May (per a CNBC article).

Meanwhile, the strong labor market and recovering U.S. economy have boosted the positive market sentiments as consumer confidence also improved in March after declining for the first two months of 2022. The Conference Board's measure of consumer confidence index stands at 107.2 in March 2022 versus 105.7 in February. Moreover, March’s reading nominally surpassed the consensus estimate of 107, per a Bloomberg survey of economists. However, the metric continues to be below the pre-pandemic level of 132.6 achieved in February 2020.

The latest encouraging preliminary consumer sentiment readings for early April can also be largely attributed to the improving job market. The University of Michigan’s preliminary consumer sentiment rose to 65.7 in early April from a final reading of 59.4 last month, improving 10.6% over the prior month. The metric surpassed the market forecast of the index, coming in at 59.

Industrial ETFs in Focus

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

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

The Industrial Select Sector SPDR Fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. The Industrial Select Sector SPDR Fund has AUM of $15.06 billion and an expense ratio of 0.10% (read: 5 ETF Areas Shining Bright as US Economy Looks Strong).

Vanguard Industrials ETF (VIS - Free Report)                   

Vanguard Industrials ETF offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. Vanguard Industrials ETF manages AUM of $4.40 billion and an expense ratio of 0.10%.

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. Fidelity MSCI Industrials Index ETF has AUM of $799.2 million and an expense ratio of 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. iShares U.S. Industrials ETF has AUM of $1.33 billion and an expense ratio of 0.41%, as stated in the prospectus.

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