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4 Industrial Mutual Funds to Buy as Output Recovers

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Industrial production bounced back last month after two consecutive months of decline, following an increase in factory production. The rebound sustained the flow of encouraging economic data in September. Decline in the impact of hurricanes Harvey and Irma in September and recovery in utilities and construction gave a boost to last month’s industrial output.

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 the encouraging data that raised hopes for the industrials sector for the coming months.

Industrial Production Rebounds

Industrial production in September bounced back after forgettable July and August performances. The Board of Governors of the Federal Reserve System reported that industrial production increased 0.3% in September, in contrast to a decrease of 0.7% in August. It also exceeded the consensus expectation of a 0.1% increase and advanced at an annual rate of 1.6% year over year.

Also, capacity utilization advanced from 75.8% to 76 % last month. Although capacity utilization remained below its long-run (1972–2016) average by 3.9%, it posted growth of 1.1% in the last one year. Moreover, with recent economic data like ISM Manufacturing Index and new orders remaining upbeat, it is expected that economy will be able to expand its capacity gradually. 

Encouraging Industry Groups’ Data

After weak results in the prior two months, manufacturing output rose 0.1% in September. Although non-durable output posted a decline, durables registered a rise of 1%. In durables, nonmetallic mineral products, and machinery and electrical appliances together saw a gain of 3%. In non-durables, only plastics and rubber products and indexes for food, beverage, and tobacco products increased.

Also, in market groups, a rebound in both consumer durables and non-durables drove consumer goods output by 0.5% in September. Further, business equipment increased 0.8%, while business supplies and construction supplies recorded gains of 0.6% and 1.9%, respectively.

Manufacturing Index Best in 13 Years

According to the Institute of Supply Management (ISM), the manufacturing index climbed to 60.8% in September from 58.8% in August, scaling the highest level since May 2004. The improvement was largely driven by strength in new orders, which jumped 4.3 points to 64.6%. Orders are also expected to remain strong in the coming months as the inventory level remained at a six-year low.

Although the overall job report was weaker than expected last month, the sentiment remained positive after the jobless rate settled at its lowest level in the last 16 years. Separately, retail sales rebounded with strong gains in September and consumer confidence reached its best level since 2004.

Buy These 4 Industrial 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 11.8% 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 registered strong returns. According to Morningstar, the industrials mutual fund posted year-to-date and 1 year returns of 16.9% and 27.9%, respectively.

Against this encouraging backdrop, we have selected four 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) returns. These 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 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 equipment and provide transportation services. The non-diversified fund invests in both U.S. and non-U.S. companies.

The fund has YTD returns of 12.9%, and an expense ratio of 0.82% as compared with the category average of 1.21%. FSRFX has a Zacks Mutual Fund Rank #1. FSRFX invests 99.11% of its assets in one of the key sensitive sectors — industrials.

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

The fund has YTD returns of 12.7%, and an expense ratio of 0.77% as compared with the category average of 1.21%. FCYIX has a Zacks Mutual Fund Rank #1.It invests 85.28% of its assets in industrials.

Vanguard Precious Metals and Mining VGPMX seeks growth of capital over the long term. The fund invests heavily in the stocks of both domestic and foreign companies which are mostly involved in mining, processing, distribution and marketing of metals or minerals. This non-diversified fund may also invest around one-fifth of its assets in gold, silver and other precious metals coins and bullion.

The fund has YTD returns of 12.3%, and an expense ratio of 0.43% as compared to the category average of 1.24%. VGPMX has a Zacks Mutual Fund Rank #1. VGPMX invests 98% of its assets in one of the key cyclical sectors — basic materials.

Fidelity Select Industrial Equipment Portfolio FSCGX invests a large portion of its assets in securities of companies principally engaged in the manufacture, distribution, or service of products and equipment for the industrial sector. FSCGX seeks appreciation of capital and invests in both domestic and foreign companies.

The fund has YTD returns of 14.8%, and an expense ratio of 0.83% as compared to the category average of 1.21%. FSCGX has a Zacks Mutual Fund Rank #2.It invests 92.98% of its assets in industrials.

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