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Mutual Fund Commentary

Industrial production bounced back last month from a sluggish August, following an increase in factory production. The rebound sustained the flow of encouraging economic data in September. Upbeat industrial production indicated that oil producers and manufacturers were able to gather a strong foothold in the third quarter of this year.

Given these positive trends, the addition of mutual funds that have significant exposure to the industrials sector could be a suitable investment option. Now, we will take a glance at encouraging data that raised hopes for the industrials sector for the coming months.

Industrial Production Rebounds

Industrial production in September recovered after a forgettable August. The Board of Governors of the Federal Reserve System reported that industrial production increased 0.1% in September, in contrast to a decrease of 0.5% in August. Also, industrial output advanced at an annual rate of 1.8% last quarter, registering its best quarterly increase in the last one year.

Also, capacity utilization advanced from 75.3% to 75.4% last month. Although capacity utilization remained below its long-run (1972–2015) average by 4.6%, it posted growth of 0.4% in the last one year. Moreover, with recent economic data like ISM Manufacturing Index and factory orders remaining upbeat, it is expected that economy will be able to expand its capacity gradually. 

Encouraging Industry Groups Data

After the weak results in August, manufacturing output rose by 0.2% in September. Although durable production was unchanged, non-durable output increased 0.5%. In non-durables, coal and petroleum products, and printing and support goods together saw a gain of 1.5%. Mining indexes also rose 0.4%.

Also, in the market groups, a rebound in both consumer durables and non-durables drove consumer goods output by 0.2% in September.  Further, business and construction supplies rose 0.8% last month, partly reversing major losses in August. Non-durable materials posted broad-based gains.

Manufacturing Index and Factory Orders Rally Up

The ISM Manufacturing Index increased to 51.5 in September from 49.4 in August, signaling an expansion in overall factory growth. Strong gains in new orders led manufacturing activity to rebound last month. Additionally, factory orders rose 0.2% in August after advancing 1.4% in July.

Although the overall job report was slightly weaker than expected last month, a modest job growth was prompted by hiring in healthcare, retailers and professional services. Separately, retail sales registered strong gains and consumer confidence reached its best level since recession.

Buy These 3 Industrials Mutual Funds

As discussed above, recent data related to the industrials sector clearly indicate growth. This is borne out by the fact that the Industrial Select Sector SPDR (XLI) gained 2% in the last six months, turning out to be one of the best performing sectors among the major S&P 500 sectors. Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, the industrials mutual fund posted year-to-date and 1 year returns of 6.9% and 7.4%, respectively.

Against this encouraging backdrop, we have selected three industrial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive year-to-date (YTD) return. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Select Industrial Equipment Portfolio (FSCGX - Free Report) invests the lion’s share of its assets in the companies which are engaged in the industrial sector. FSCGX seeks appreciation of capital. The fund invests in both domestic and foreign companies.

The fund has YTD return of 4.8%, and an expense ratio of 0.82% as compared to the category average of 1.22%. FSCGX has a Zacks Mutual Fund Rank #1. FSCGXhas a history of positive total returns for over 10 years.  Specifically, the fund’s returns over the 3, 5 year benchmarks; 3 year 7.7% and 5 year 15.8%.

Fidelity Select Transportation (FSRFX - Free Report) seeks capital growth. FSRFXinvests the majority of its assets in securities of companies involved in design, manufacture and sale of transportation equipments and provide transportation services. The non-diversified fund invests in both U.S. and non-U.S. companies.

The fund has YTD return of 11.4%, and an expense ratio of 0.80% as compared to the category average of 1.22%. FSRFX has a Zacks Mutual Fund Rank #2. FSRFX has a history of positive total returns for over 10 years.  Specifically, the fund’s returns over the 3, 5 year benchmarks; 3 year 11.2% and 5 year 18.3%.

Fidelity Select Industrials (FCYIX - Free Report) seeks capital growth by investing mainly in equity securities. FCYIX invests the bulk portion of its assets in securities of companies involved in manufacture, development, sales and distribution of industrial products and equipments. The fund invests in both U.S. and non-U.S. companies.

The fund has YTD return of 3.8%, and an expense ratio of 0.76% as compared to the category average of 1.22%. FCYIX has a Zacks Mutual Fund Rank #1.FCYIXhas a history of positive total returns for over 10 years.  Specifically, the fund’s returns over the 3, 5 year benchmarks; 3 year 7.4% and 5 year 16.3%.

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