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ETFs to Suffer as ISM Index Drops to Lowest Level in a Decade

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The latest report on U.S. manufacturing, released by the Institute for Supply Management (ISM) has failed to cheer investors. The ISM Manufacturing Purchasing Managers’ Index (PMI) in the United States was at the lowest level since June 2009 at 47.2% for December 2019 versus 48.1 in November. It also lagged analysts’ expectations of an increase to 49.0, per a Reuters’ poll. Also, the reading came in for the fifth straight month below the benchmark level of 50 in December. Notably, readings below 50% indicate contraction. ISM data also reflected that the December’s reading for new orders had declined to 46.8% in comparison with 47.2% in November. There was also a decline in employment, order backlogs and inventories (read: ETFs That May Suffer as US Consumer Confidence Takes a Hit).

What’s Behind the Downside?

It is believed that the trade war has been affecting manufacturing levels. The Sino-US trade war exchanges have kept investors on the edge, making it difficult for business houses to chalk out a strong and concrete business strategy and capital expenditures. Moreover, there is no denying the fact that global economic growth suffered the brunt of the trade tussle.

However, analysts believe that Boeing’s decision to halt production of its 737 MAX airliner has affected the manufacturing sector. In fact, per JPMorgan's chief U.S. economist Michael Feroli, Boeing's recent decision will chop 0.5 percentage points off gross-domestic-product growth in the first quarter of 2020 (read: Boeing to Halt 737 Production: ETF Losers & One Likely Winner).

Looking Forward

The interim trade deal between United States and China, where the former has agreed to reduce some existing tariffs and indefinitely postpone the pre-scheduled Dec 15 tariffs, can drive manufacturing activities in the United States. Also, concerns over slowing global growth have abated to some extent.

In this regard, ISM chair Timothy Fiore commented that “global trade remains the most significant cross-industry issue, but there are signs that several industry sectors will improve as a result of the phase-one trade agreement between the U.S. and China.”

ETFs in Focus

Against this backdrop, investors can take a look at the following ETFs (see all industrial ETFs here):

The Industrial Select Sector SPDR Fund XLI

The fund tracks the Industrial Select Sector Index. It has returned 26.1% in the past year (read: Fed to Not Hike Rates in 2020: ETF Areas to Shine).

AUM: $11.06 billion

Expense Ratio: 0.13%

Vanguard Industrials ETF VIS

The fund tracks the MSCI US Investable Market Index (IMI) Industrials 25/50 index. It has returned 27.2% in the past year (read: Top-Ranked ETFs & Stocks to Feast on Thanksgiving and After).

AUM: $3.67 billion

Expense Ratio: 0.10%

iShares U.S. Industrials ETF IYJ

The fund tracks the Dow Jones U.S. Industrials Index. It has returned 29.5% in the past year.

AUM: $991 million

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF (FIDU - Free Report)

The fund tracks the MSCI USA IMI Industrials Index. It has returned 27.7% in the past year.

AUM: $467.2 million

Expense Ratio: 0.08%

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