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US Industrial Production Beats Expectations: ETFs in Focus

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U.S. Industrial production increased more than expected in December, as extreme winter in the East and Mid-Western United States increased demand for heating, thus pushing up utility production. Utility production increased 5.6% in December, the highest since March 2017.

Into the Headlines

Factory production in the U.S., which accounts for more than 70% of industrial output, increased a mere 0.1% in December. A 1.5% drop in production of primary metals caused factory production to slow.

Industrial production locked in a strong performance toward the end of 2017, as the impact of hurricanes Harvey and Irma faded. Moreover, improving global trade outlook and a weaker dollar also contributed to the strong production number (read: 3 Sector ETFs & Stocks to Sizzle Despite Downbeat Job Data).

Per the Federal Reserve, industrial production in the U.S. increased 0.9% in December compared with 0.1% decline in the prior month, and surpassing expectations of a 0.4% rise. Moreover, overall industrial production, including manufacturing, mining and utilities increased 3.6% in 2017, the best annual performance since 2010 (read: 6 Dow Stocks That Should Drive These ETFs Higher).

Economic Scenario

United States’ GDP grew 3.2% in the third quarter compared with 3.1% in the previous quarter. Although the third quarter reading was below market expectations of 3.3%, it was the highest since first-quarter 2015. U.S. retail sales grew 4.2% in 2017 compared with 3.2% in 2016, showing signs of a strengthening economy.      

Moreover, Trump’s tax reform is expected to significantly benefit U.S. companies. Strong production data supports the market’s expectations of a rate hike by the Fed in the March FOMC meeting. Per the CME Fed Watch tool, markets believe there is a 72.6% chance of a 25 basis point rate hike and a 1.1% chance of a 50 basis point rate hike on the Mar 21, 2018 FOMC meet.

Let us now discuss a few ETFs focused on providing exposure to U.S. Industrial equities (see all Industrial ETFs here).

Industrial Select Sector SPDR Fund (XLI - Free Report)

This fund is one of the most popular U.S. equity ETFs and focuses on providing exposure to the U.S. industrial sector.

It has AUM of $15.4 billion and charges a fee of 14 basis points a year. From a sector look, Aerospace & Defense , Machinery and Industrial Conglomerates take the top three spots, with 25.7%, 18.4% and 16.3% allocation, respectively (as of Dec 31, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co (BA - Free Report) , 3M Co (MMM - Free Report) and Honeywell International (HON - Free Report) with 7.8%, 5.8% and 4.8% allocation, respectively (as of Jan 17, 2018). The fund has returned 29.8% in a year. XLI has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Industrials ETF (VIS - Free Report)

This ETF is a pure play on the U.S. industrials sector.

It has AUM of $3.9 billion and charges a fee of 10 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Industrial Machinery take the top three spots, with 22.3%, 14.4% and 11.0% allocation, respectively (as of Dec 31, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co, General Electric (GE - Free Report) and 3M Co with 5.4%, 5.0% and 4.6% allocation, respectively (as of Dec 31, 2017). The fund has returned 26.9% in a year. VIS has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Industrials ETF (IYJ - Free Report)

This ETF is a relatively costly bet on the U.S. industrial sector.

It has AUM of $1.3 billion and charges a fee of 44 basis points a year. From a sector look, Capital Goods, Software & Services and Transportation take the top three spots, with 57.6%, 13.3% and 12.7% allocation, respectively (as of Jan 16, 2018). From an individual holdings perspective, the fund has high exposure to Boeing Co, General Electric and 3M Co, with 5.3%, 4.4% and 4.1% allocation, respectively (as of Jan 16, 2018). The fund has returned 29.5% in a year. IYJ has a Zacks ETF Rank #3 with a Medium risk outlook.

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