Industrial Output Posts 20-Month High Gain: 3 ETFs to Buy

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Encouraging gain in industrial production for two consecutive months, which also includes last month’s record gain, indicates that the industrial sector is gradually recovering from the rough patch that it had witnessed in the first half of the year. Also, the manufacturing and mining sectors rebounded strongly in recent times after witnessing a slump for nearly one and a half years. Moreover, a rise in capacity utilization showed that the industrial sector has succeeded in boosting efficiency level over the past few months.

Biggest Gain in Output Since Nov 2014

According to the Board of Governors of the Federal Reserve System, industrial production increased 0.7% in July, posting its highest percentage increase since Nov 2014. The rise in industrial production in July was also higher than the consensus expectation of a 0.3% increase. It is preceded by a 0.4% gain witnessed in June (read: ETFs to Play 16-Month High US Manufacturing Data).

Also, capacity utilization advanced from 75.4% to 75.9% last month, more than the consensus expectations of 75.6%. Further, the indexes in some of the key market groups also rose last month. Additionally, most of the industry groups’ data was also encouraging.

What Led to the Gain?

Strong growth in manufacturing and mining production, which suffered heavily over the past 18 months, played an important role in boosting industrial output last month. Solid gains in durable and non-durable production led manufacturing output to grow 0.5%, the strongest gain in the past six months.  Moreover, mining production, which slumped 10.2% over the past one year period, saw an increase of 0.7% in July (read: Want to Dig Into Mining ETFs with 100% YTD Gains Seen Already?).

Separately, among the market groups, energy production emerged as the biggest gainer last month. The report showed that energy output, which declined 3.2% over the past one year period, was up 1.7% last month, preceded by 1.5% and 1% increase registered in June and May, respectively. Moreover, materials production, which increased 1% during the month, also played an important role in leading industrial output higher.

Further, business and construction supplies rose 0.4% last month, registering its first percentage rise since April 2016. Also, utilities production moved up 2.1% in July after witnessing the same rate of growth in previous month. A 2.5% gain in electric production was one of the key factors behind the increase in industrial production increase last month.

3 ETFs to Buy

Though capacity utilization witnessed strong gains in July, it is still lower than the long-term average of 80%, indicating that the industrial sector has scope to boost its efficiency level further in the improving economic scenario. Thus, it may prove prudent to invest in industrial ETFs for investors looking to capitalize on this encouraging environment. We have highlighted four industrial ETFs that have a Zacks ETF Rank #2 (Buy) and hence are poised to provide encouraging returns in the coming days (see all Industrials ETFs here).

iShares US Industrials IYJ

This fund provides exposure to 213 firms by tracking the Dow Jones U.S. Industrials Index. The fund has an AUM of $803 million while it has an impressive average daily volume of 90,000 shares. The product has nearly 37% of its assets invested in its top 10 holdings. Sector-wise, capital goods takes the top spot at 58.3% while software and services (13%) and transportation (11.8%) hold the next two positions. IYJ charges a fee of 43 bps annually. The fund has returned 8% and 11.7% over the three-month and year-to-date periods, respectively.

Fidelity MSCI Industrials ETF FIDU

This ETF has an AUM of $150.9 million and average daily volume of more than 78,000 shares. This fund provides exposure to a basket of 335 industrial stocks by tracking the MSCI USA IMI Industrials Index. The product charges only 0.08 bps in fees per year from investors. From a sector perspective, aerospace & defense makes up for 23.8% share while industrial conglomerates and machinery round off the next two spots with a double-digit exposure each. The fund has returned 8.7% and 12.5% over the three-month and year-to-date periods, respectively (read: Industrial Q2 Results Fail to Lift ETFs).       

First Trust RBA American Industrial Renaissance ETF AIRR

This product tracks the Richard Bernstein Advisors American Industrial Renaissance Index. In total, it holds 42 securities with almost 37.1% of its assets allocated to the top 10 holdings. AIRR has an AUM of $17.6 million and light average daily volume of around 11,000 shares. From a sector look, engineering and construction takes the top spot at 34% while industrial engineering, electrical equipment and commercial services and supplies round off the top four. The fund has returned 14% and 19.1% over the three-month and year-to-date periods, respectively.

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