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Although unemployment remains intolerably high and European issues continue to dominate the headlines, some ‘green shoots’ have begun to permeate the economic environment, especially in the United States. Industrial production, for example, has been on the rise for several months now and has reached a post-recession high in terms of capacity utilization rates. In fact, in the most recent reading of this important data point, the rate surged to 77.8%, beating out consensus estimates for the time period by a wide margin. Furthermore, total industrial production rose by 0.7% in month-over-month terms, well above the consensus forecast and far higher than the prior revised figure of a -0.1% loss in September.

Thanks to this strength, led by a rebound in automotive manufacturing, some are beginning to grow increasingly optimistic over the resiliency of the American economy, especially in the face of ever-present worries in Europe. "The continued resilience of manufacturing is encouraging, since this should be the sector most exposed to the global economic slowdown," said Paul Ashworth, chief U.S. economist with Capital Economics. Yet, despite this rebound, and the industrial sector’s ability to lead the markets in cyclical environments, many ETFs in the industrial space remain beaten down in year-to-date terms, suggesting intrepid investors may have a chance to add to gains in the months ahead should these positive trends continue.

While it should be noted most funds in this sector have posted solid gains over the past few weeks, there is still room for growth, especially when looking from longer time periods. As a result, investors might be wise to consider one of the following three industrial ETFs for inclusion in their portfolios, especially if these strong industrial production figures continue into the future:

Industrials SPDR (XLI - Free Report)

This fund is by far the most popular industrial ETF in the space with more than $3 billion in AUM and average daily volume of over 23 million shares. (GE - Free Report) takes the top spot in the fund at roughly 9.9% of assets while (UTX - Free Report) , (UPS - Free Report) , and (CAT - Free Report) also make up at least 5% of assets as well. In total, 60 companies comprise the fund’s holdings list giving the product a heavy tilt towards giant and large cap firms.

In terms of performance, XLI is down about 2.7% in year-to-date terms while the product pays out a decent dividend of just over 2%. For expenses, XLI is by far the cheapest on the list with costs of just 20 basis points a year, suggesting that it could be an interesting choice for those seeking to keep total fees low.

Vanguard Industrials ETF (VIS - Free Report)

For those seeking an ETF with a bigger security basket, VIS could make for an interesting choice. The fund holds 365 securities in total with virtually all of the stocks coming from the American industrial sector. Although the fund does give nearly 23% of its assets to mid caps and another 12% to small and micro cap securities, it still is very top heavy. In fact, this popular Vanguard fund puts just over 40% of its assets in the top ten holdings, giving heavy weights to large and giant cap securities. Once again, GE takes the top spot at just over 12% of assets while the next three securities on the list combine to roughly equal General Electric in weight for the fund.

In terms of performance, VIS has lost 4.4% on the year although it has bounced-back stronger than its more popular counterpart from State Street. The fund’s yield is also lower than XLI but the greater diversity in holdings is probably to blame for this, suggesting that for those looking for a more balanced play in terms of market capitalization, VIS could be an interesting way to play a rebound in the sector.

First Trust Industrial/Producer Durables AlphaDex Fund (FXR - Free Report)

Some investors prefer a more ‘active’ tilt in their ETFs, and for those that do, FXR makes for an interesting play. The fund follows the StrataQuant Industrials Index which is based on the AlphaDEX stock picking methodology. This technique ranks stocks on a number of growth and value factors and gives the highest weights to the top rated stocks. Additionally, the fund eliminates the bottom quarter ranked securities, giving the fund a tilt towards top rated securities but also making the basket far smaller than many others in the space. In fact, the fund holds about 100 securities and does not give any one stock more than 2% of assets. Furthermore, since the fund is not weighted by market cap, small caps dominate the holdings list, giving the product a potentially more volatile tilt.

However, investors have to pay for this greater level of activity as the fund has an expense ratio of 70 basis points a year. This is more than three times the cheapest products in the category and the fund has failed to make up for this extra cost in the short term. However, with that being said, when looking at the product from a much longer time frame, it has greatly outperformed its competitors in the space, suggesting that this may be the go to product if the economy stabilizes in the near future.

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