The U.S. industrial sector has felt the burden of the rising interest rates to control high inflation levels and supply-chain disturbances due to the Russia-Ukraine conflict and the prevalent pandemic. Despite these external headwinds, the S&P 500 Industrials Index (sector) declined only 10% so far in 2022, comparing favorably with the broader sector’s 13.8% fall.

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 56.1% in May from 55.4% in April and surpassed the forecast of 54.5%. Any reading above 50% indicates expansion in the U.S. manufacturing activities. Notably, 15 of 18 manufacturing industries witnessed growth in May. The New Orders Index rose to 55.1% in May from 53.5% in April. The production reading was 54.2%, increasing from the April figure of 53.6%. The inventories reading also jumped 55.9% in May from 51.6% in April.

April’s encouraging U.S. industrial output data brought in some hope despite the current turbulent market conditions. Per the Fed’s recently-released data, total industrial production rose 1.1% in the month. It stood out as the fourth straight month of gains of 0.8% or higher. Moreover, a 0.8% increase in the manufacturing output also looks positive. There was a 2.4% rise in utility production. Moreover, mining production witnessed a 1.6% uptick, mainly due to strength in the oil and gas sector.

Total industrial production increased 6.4% from the year-ago figure in April. According to the Fed’s report, the durable and the nondurable manufacturing indexes inched up 1.1% and 0.3%, respectively, in April. The other manufacturing (publishing and logging) index was also up 0.9% in the month.

The latest jobs report is also a positive. The U.S. economy added 390,000 jobs in May, beating market forecasts of 325,000 but lagging 436,000 jobs in April. The unemployment rate was at 3.6%, just above the lowest level since December 1969. Average hourly earnings inched up 0.3% from April’s reading, slightly lower than the 0.4% estimate. The year-over-year increase of 5.2% for wages was in line with the expectations.

However, there are certain factors that can weigh on the industrial sector.  The strong U.S. economic reports, especially the jobs report might push the Federal Reserve to hike rates aggressively to control inflation. The Fed’s aggressive measures may push the U.S. economy into a recession and slow down the U.S. economic recovery achieved so far from the pandemic lows.

Industrial ETFs in Focus

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

The Industrial Select Sector SPDR Fund (XLI Quick QuoteXLI - 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 an AUM of $14.06 billion and an expense ratio of 0.10% (read: Why Fear High Inflation? Play Cyclical ETFs).

Vanguard Industrials ETF (VIS Quick QuoteVIS - 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 an AUM of $3.53 billion and an expense ratio of 0.10%.

Fidelity MSCI Industrials Index ETF (FIDU Quick QuoteFIDU - 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 an AUM of $712.1 million and an expense ratio of 0.08%.

iShares U.S. Industrials ETF (IYJ Quick QuoteIYJ - 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 an AUM of $1.34 billion and an expense ratio of 0.41%, as stated in the prospectus.