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U.S. Manufacturing Back to Health: ETF Winners & Losers

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The ISM Manufacturing PMI in the United States rose to a reading of 50.9 in January, marking the highest level since July, from an upwardly revised 47.8 in December. The data came ahead of economists’ poll of 48.5 for January. A reading above 50 indicates expansion in the manufacturing sector, which makes up about 11% of the U.S. economy.

The latest reading also marks the first month of expansion in the manufacturing sector, after five straight months of contraction. The U.S.-China trade war played part in the lackluster performance of the previous months as there was a steep contraction in new export orders. Supply chain adjustments, as a result of moving the manufacturing base from China, was probably reflected in the manufacturing data.

The new order index jumped 4.4 points from a month earlier to 52 and the employment index gained 1.4 points to 46.6. In addition, the production index surged 9.5 points to 54.3, and the supplier deliveries index added 0.7 points to 52.9.

Though the signing of the phase-one trade deal bodes well for the U.S. manufacturing sector, “global trade remains a cross-industry issue.” However, industry players started getting hopeful about trade in January.  Food, Beverage & Tobacco Products appears to be best-positioned, while Petroleum & Coal Products was the weakest. Out of the 18 manufacturing industries, eight reported growth in January.

Having said this, we would like to note that the near-term outlook of the industry is shrouded. Along with many analysts, we believe the coronavirus outbreak and its impact on supply chains may subdue the new-found optimism in the U.S. manufacturing sector.

Here we highlight the possible ETF winners and losers in the light of ISM manufacturing data for the month of January.

Winners

Invesco Dynamic Food & Beverage ETF (PBJ - Free Report)

Food, Beverage & Tobacco Products recorded growth in the month as “demand for prepared frozen food continues to be strong”. This puts the spotlight on PBJ, the fund which comprises stocks of 30 U.S. food and beverage companies. These are companies that are principally engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies.

SPDR S&P Technology Hardware ETF (XTH - Free Report)

Players from the computer and electronics sector indicated a solid pickup in business. Suppliers of electronic equipments are working at or above full capacity. Electronic Equipment & Instruments industry takes about 36.98% of the fund, while Technology Hardware Storage & Peripherals (36.22%) and Electronic Components (26.80%) take the next two spots (read: Trade Deal Cut in Principle? Sector ETFs to Soar).

Invesco MSCI Global Timber ETF (CUT - Free Report)

Wood products recorded growth in the month. The underlying MSCI ACWI IMI Timber Select Capped Index measures the performance of securities engaged in the ownership and management of forests, timberlands and production of products using timber as raw materials.

Losers

VanEck Vectors Coal ETF (KOL - Free Report)

Petroleum & Coal Products industry saw contraction in the month. Industry players see more slowdown in the days to come. The underlying MVIS Global Coal Index tracks the overall performance of companies involved in coal operation, transportation of coal, production of coal mining equipment as well as from storage and trade.

SPDR S&P Retail ETF (XRT - Free Report)

Apparel and Textile Mills industries saw contraction in January. The fund has 22.38% exposure to Apparel retail, which makes XRT a bit vulnerable. However, the fund has a Zacks Rank #2 (Buy) and is poised to do well on an overall improving U.S. economy.

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