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Time to Buy Industrial ETFs on Value?

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Industrial ETFs had a great July with key products returning in the range of more than 5% to 7%. The sector was in a tight spot, thanks to trade tensions between the United States and China and rising rate concerns. But Bloomberg News reported that representatives of the United States and China are looking to renegotiate trade terms, with a view to avoid a full-blown trade war.

On Jul 6, both countries placed import tariffs on $34 billion worth of goods, while the Trump administration is warning to severe trade ties ahead if China keeps on retaliating. However, there is news doing rounds that the Trump administration may enact 25% tariffs on $200 billion of Chinese imports, up from the initially announced 10%.

Upbeat Earnings

Several industrial behemoths came up with upbeat earnings. Most recently, Caterpillar (CAT - Free Report) beat on both lines and raised 2018 outlook. Cummins Inc. (CMI - Free Report) too beat on top and bottom line and shares gained 4.2% on Jul 31. Also, the likes of Honeywell (HON - Free Report) and Union Pacific Corporation (UNP - Free Report) came up with both line beats this season (read: Bevy of Industrial Earnings Puts These ETFs in Focus).

Industrial products’ segment is expected to post 28.5% earnings growth on 11.6% revenue growth, per the Earnings Trends issued on Jul 27, 2018. This is fifth highest earnings growth among the Zacks classified 16 sectors in the S&P 500 universe.

Emergency Aid for U.S. Agricultural Sector

On Jul 24, the Trump administration announced that it will provide $12 billion emergency aid to help American farmers who have been hurt by retaliatory tariffs. The news helped shares of companies like Deere & Company DE,which manufactures agricultural, construction, and forestry machinery.

Bet on Value

Investors should note that all these stocks are sizzling with great value scores. CAT has a Value Score of A while CMI, HON and UNP sport a Value Score of B.The value score of Deere is A. After being thrashed on U.S.-Sino trade tensions, valuations these stocks are apparently low now. Recent tax cuts are also helping companies’ profitability.

ETFs to Buy?

Investors should note that industrial ETFs including Invesco S&P Small-Cap Industrials ETF (PSCI - Free Report) , S&P 500 Industrial Sector SPDR (XLI - Free Report) , Fidelity Industrials MSCI ETF (FIDU - Free Report) , Invesco S&P 500 Equal Weight Industrials ETF (RGI - Free Report) , Vanguard Industrial ETF (VIS - Free Report) and John Hancock Industrials Multifactor ETF (JHMI - Free Report) traded at a one-month high on Jul 31. The funds advanced more than 2% each on Jul 31. JHMI was up about 1.4% on the day. These funds have a Zacks Rank #2 (Buy) (read: see all industrial ETFs here).

So, investors with a strong stomach for trade-related risks can dip their toe in the industrial ETFs. After five-month long nagging trade disputes, the news is perhaps oversold. And if things between the United States and China turn better, investors can try Direxion Daily Industrials Bull 3X Shares (DUSL - Free Report) , which has gained about 21.5% past month.

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