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ETFs to Play 16-Month High US Manufacturing Data

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Sustaining the uptrend set in May, the U.S. manufacturing index reached a 16-month high in June. As per the recentmanufacturing report from the Institute for Supply Management (ISM), the reading was 53.2 in June (a reading of 50 or higher points to growth), up from 51.3 recorded in May. Economists had forecast the index in the range of 50 to 52.5, with a median score of 51.3 (read: ETFs to Watch on U.S. Manufacturing Revival).

This was the second successive month that the U.S. manufacturing sector logged gains, raising investors’ optimism about the sector. New orders index rose to 57% from 55.7% in May while production index recorded 54.7%, up from the May reading of 52.6%. The exports index also peaked the highest level since November 2014, probably due to a soggy greenback.

Investors should note that huge capex cuts by energy companies to fight back the plunge in oil prices and sluggish export demand in the wake of global growth issues were glitches in the manufacturing sector. With the recent oil-price rebound, such threats are diminishing.  Employment in the manufacturing sector grew for the first time since November.

A comparable industry measure compiled by Markit also point to improving trend. Markit’s final U.S. manufacturing PMI was 51.3 for June, up from 50.7 in May. As per trading economics, June recorded the best performance in three months, going by Markit data.

Of the 18 manufacturing industries, 13 recorded an increase in June with printing & related support activities; textile mills; petroleum & coal products and food, beverage & tobacco products deserving special mention.

Market Impact

Most of the industrial ETFs were in the green post release of the manufacturing data. While there are several ETFs available in this space, we have highlighted three funds that gained the most on July 1 – the day the data released (see all industrials ETFs here).

Industrial Innovation ETF (ARKQ - Free Report) – Up 0.83%

This actively managed ETF seeks long-term capital appreciation by investing in companies that benefit from the development of new products or services, technological improvements and advancements in scientific research.

First Trust RBA American Industrial Renaissance ETF AIRR – Up 0.82%

The fundmeasures the performance of small-and mid-cap U.S. companies in the industrial and community banking sectors.

PowerShares S&P Small-Cap Industrials Portfolio ETF PSCI – Up 0.75%

As the name suggests, the fund gives exposure to small-cap stocks belonging to the U.S. industrial sector.

Bottom Line

All in all, the improving trend noticed over the last two months indicate a solid trend reversal in the coming days, especially in the face of a dovish Fed which will keep rates lower for longer and is likely to dampen the dollar. Notably, a low interest rate environment favors the industry as the sector depends on interest rates for its operations.

On the other hand, the long-tottering energy sector might be on an upward trajectory in the days to come on an oil price recovery. This can spell optimism for the manufacturing sector as a whole.

However, the scenario beyond the U.S. border is likely to be rocky due to the expected adverse fallout of Brexit. Especially, export-oriented zones may come under threat in the coming days. As a result, it is better to bet on U.S. manufacturing revival via small-cap stocks and ETFs like PSCI and AIRR as these are more tied to the domestic economy.

Returns of AIRR and PSCI were higher than the largest industrial ETF XLI (up 0.32%) on July 1, 2016. In fact, returns of AIRR and PSCI surpassed that of XLI in the last six months (as of July 1, 2016) (read: Forget Brexit; Buy These Stocks and ETFs).

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