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Manufacturing Slows Again in April: Sector ETFs at Better Spots

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The ISM Manufacturing PMI for the United States was 55.4 in April 2022,  declining for the second month in a row. This compares to 57.1 ISM Manufacturing PMI in March and market forecast of 57.6. It marked the lowest reading since July 2020, as a slowdown was seen in production (53.6 versus 54.5 in March), new orders (53.5 versus 53.8), and employment (50.9 versus 56.3).

Meanwhile, price pressures weakened (84.6 versus 87.1) while the backlog of orders decreased (56 versus 60). “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. In April, progress slowed in solving labor shortage problems at all tiers of the supply chain,” Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee, said, per Out of the 18 manufacturing industries, 17 reported growth in April.

Against this backdrop, below we highlight a few ETF areas that look steady despite a downbeat manufacturing environment.

ETFs in Focus

Transportation – SPDR S&P Transportation ETF (XTN - Free Report) – Zacks Rank #2 (Buy)

The survey conducted in the transportation equipment industry revealed, “continued strong demand with improvements in the supply chain. Delays still exist, but supply issues are slowly improving. Cost increases in multiple categories." This can be viewed as a ray of hope. Plus, the ebbing pandemic and the economic reopening is a plus for the transportation sector.

The underlying S&P Transportation Select Industry Index of the fund XTN represents the transportation segment of the S&P Total Market Index. The fund charges 35 bps in fees.

Industrials – Industrial Select Sector SPDR ETF (XLI - Free Report) – Zacks Rank #2

The survey conducted in the Electrical Equipment, Appliances & Components sector indicated that "business is strong. Backlog continues to grow due to new orders and inconsistent supply chain conditions. Shortages of components are the main factor limiting our production." The Machinery industry survey indicated that “new order entries are still very strong,” although logistics issues have (not) yet improved, resulting in longer lead times.

Materials – iShares U.S. Basic Materials ETF (IYM - Free Report) – Zacks Rank #3 (Hold)

Survey in the Nonmetallic Mineral Products industry indicated “improvements in supply chain.” However, the operators see suppliers that sell low-volume items, struggling in some cases with getting feed stocks and raw materials they require. Plastics & Rubber Products industry survey revealed that business is still strong. Higher material price is being passed onto customers based on the cost of raw materials, logistics and labor to produce products.

The underlying Russell 1000 Basic Materials RIC 22.5/45 Capped Gross Index measures the performance of the basic materials sector of the U.S. equity market. The fund charges 41 bps in fees.

Food & Beverage Invesco Dynamic Food & Beverage ETF (PBJ - Free Report) – Zacks Rank #3

The industry is facing supply chain issues and prices continue to rise. Food, Beverage & Tobacco Products companies are trying to resort to ways to stay profitable. Relationship management and strong negotiation skills are being used to optimize profits.

The underlying Dynamic Food & Beverage Intellidex Index comprises stocks of 30 U.S. food and beverage companies. These are companies that are principally engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies. The fund charges 63 bps in fees.