The ISM Manufacturing PMI inched up to 47.7 in February 2023 from 47.4 in January (which was the lowest since May 2020), but fell shy of expectations of 48. The reading hints at a fourth successive month of declining factory activity.

New orders (47 versus 42.5) and backlogs of orders (45.1 versus 43.4) shrank at a slower pace and the customers’ inventories index remained at ‘too low’ levels (46.9 versus 47.4), a positive for future output. On the other hand, a bigger fall was seen in production (47.3 versus 48) while employment declined (49.1 versus 50.6).

However, companies indicated that the business sentiment is positive for the second half of the year. Against this backdrop, below we highlight a few sectors that emerged winners last month. Though some associated sector ETFs have lost in returns past month, the latest manufacturing data shows strength in the sector, calling for a buy-the-dip strategy. Notably, these sector ETFs beat the S&P 500 (down 4.1%) past month (as of Feb 1, 2023).

Sector ETFs in Focus

Semiconductors – VanEck Semiconductor ETF (SMH Quick QuoteSMH - Free Report) – down 3.5% Past Month

The survey for Electrical Equipment, Appliances & Components indicated that new orders remain solid and production has been running smoothly for several months. However, supply crunch for some electronic equipment has been noticed.

The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund charges 35 bps in fees.

Food, Beverage & Tobacco Products – Invesco Dynamic Food & Beverage ETF (PBJ Quick QuotePBJ - Free Report) – down 3.2% Past Month

Though the business for the first half of 2023 in the United States is expected to be soft, the second half is likely to be better. However, sales slowdown is expected in Europe for the whole of 2023. Still, we believe that the business for this segment is likely to be less impacted by recession fears as most companies hailing from this segment come either from the staples sector or from vice industries. And both sectors perform better in a recessionary environment.

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.

Materials – SPDR S&P Metals & Mining ETF (XME Quick QuoteXME - Free Report) – down 1.4% Past Month

Survey for Fabricated Metal Products revealed that new orders are still going solid. However, price increases (although at a slower rate than a year ago) have been a constant problem. This in, turn, resulted in margin pressure. Survey for Nonmetallic Mineral Products indicated that no huge decline in manufacturing is expected despite recession fears. Industry players believe that the “worst case is flat.”

The underlying S&P Metals & Mining Select Industry Index represents the metals and mining sub-industry portion of the S&P Total Market Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, American Stock Exchange, NASDAQ National Market and the NASDAQ Small Cap exchanges. The Metals & Mining Index is a modified equal-weight index. The fund charges 35 bps in fees.