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Forget Manufacturing Slowdown, Bet on These Industrial ETFs

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The ISM Manufacturing PMI in the United States dropped to 48.3 in October 2019 from 47.8 in the previous month, falling shy of market expectations of 49.1. A six-week long strike by General Motors’ GM workers are thought to be contributing to the debacle. The latest reading marks the contraction in the manufacturing sector for three months in a row. A 35-month long stretch of expansion first came to a halt in August.

The production index slumped 1.1 points from a month earlier to 46.2. In addition, the supplier deliveries index dropped 1.6 points to 49.5. Prices dropped 4.2 points to 45.5, order backlog declined 1 point to 44.1 while imports fell 2.8 points to 45.3. The backlog of orders index has shrunk for the sixth straight month while prices have fallen for five consecutive months.

The U.S.-China trade war is largely responsible for this continued slowdown in manufacturing. This came against the expectation that the Trump administration would do wonders for the manufacturing sector. 

However, the new order index gained 1.8 points from a month earlier to 49.1. The employment index also added 1.4 points to 47.7. Inventories jumped 2.0 points to 48.9. These improvements led some market watchers believe that manufacturing slowdown won’t deteriorate.

Chris Rupkey, chief financial economist at MUFG, said in a note, “there are even some green shoots for the manufacturing sector as orders are picking up and orders lead the way forward for production and output and jobs,” as quoted on CNBC. The upbeat jobs data for the month of October has also contributed to the optimism.

Investors should also note that industrial ETFs have been on a tear this year despite manufacturing slowdown and contraction. Also, these funds have been in positive territory in the past week (see all industrial ETFs here).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The underlying SPADE Defense Index comprises approximately 50 U.S. companies whose shares are listed on a U.S. exchange. These are companies that are principally engaged in the research, development, manufacture, operation and support of defense, military, homeland security and space operations. The fund charges 59 bps in fees and has a Zacks Rank #2 (read: Aerospace and Defense ETFs Gain Despite Mixed Q3 Earnings).

SPDR S&P Future Security ETF (FITE - Free Report)

The underlying S&P Kensho Future Security Index comprises U.S.-listed equity securities of companies domiciled across developed and emerging markets worldwide that are included in the Future Security sector. The fund charges 46 bps in fees.

John Hancock Multi-Factor Industrials ETF

The underlying John Hancock Dimensional Industrials Index is a rules-based index of U.S. industrial stocks that have been selected based on sources of expected returns. Securities on the index are classified according to their market capitalization, relative price, and profitability, and are weighted accordingly in favor of smaller, less-expensive, more-profitable companies. The fund charges 40 bps in fees.

Industrial Select Sector SPDR Fund (XLI - Free Report)

This broader industrial fund gives exposure to areas like industrial conglomerates; aerospace & defense; machinery; air freight & logistics; road & rail; commercial services & supplies; electrical equipment; construction & engineering; building products; airlines; and trading companies & distributors. It charges 13 bps in fees and has a Zacks Rank #1 (Strong Buy).

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