Will ETFs Gain on Upbeat US Manufacturing Data for August?

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This story originally appeared on Zacks

The latest ISM Manufacturing Purchasing Managers’ Index (PMI) data for the United States is painting a rosy picture for the industrial sector. The metric rose to 59.9 in August from 59.5 in July and surpassed forecasts of 58.6, per a Reuters article. Any reading above 50% indicates expansion in U.S. manufacturing activities. Notably, the manufacturing sector, which makes up 11.9% of the U.S. economy, saw the reading witnessing the 15th consecutive month of growth.The six biggest manufacturing industries — Computer & Electronic Products, Fabricated Metal Products, Chemical Products, Food, Beverage & Tobacco Products, Transportation Equipment, and Petroleum & Coal Products — delivered moderate to strong growth in August.

The New Orders Index climbed to 66.7%, up 1.8 percentage points from the July reading of 64.9%. The Production Index recorded at 60% rose 1.6 percentage points from the July reading. The Backlog of Orders Index touched 68.2%, 3.2 percentage points higher sequentially. However, the Supplier Deliveries Index reading was 69.5%, decreasing 3 percentage points from the July figure.

How is U.S. Economy Presently Placed?

U.S. consumers seem worried about the sustainability of economic recovery from the pandemic-led slump, surging delta variant threat and increasing inflation levels. Consequently, the consumer confidence in the United States slipped to a six-month low in August. The Conference Board’s measure of consumer confidence index stands at 113.8 (the lowest level since February), comparing unfavorably with July’s reading of 125.1.

The virus variant remains a serious concern as the number of cases is rising in the United States. The new cases arising from the delta variant are being mostly observed among the unvaccinated population. Going by Johns Hopkins University data, the United States is witnessing an average of 160,000 new COVID-19 cases a day, per a CNN report.

The resurging cases might scare investors as they worry about implementation of new lockdown measures to control the spread, which may hurt the global economic recovery achieved so far.

The increasing concerns about the surging coronavirus cases due to the delta variant continue to dampen U.S. consumer sentiments. The metric surprisingly slid to a pandemic-era low level in early August when compared to a reading of 70.8 recorded in April 2020. The University of Michigan’s preliminary consumer sentiment index fell to 70.2 in August from 81.2 last month. The reading was the lowest since December 2011 as Americans seem to be sceptical about things like personal finances, inflation and employment.

Meanwhile, Wall Street has impressed investors with an attractive rally in the three broader indices in August. The second-quarter earnings season saw better-than-expected results, stimulating the rally in stock markets. According to a CNBC article, the S&P 500 is on track to witness the largest increase since fourth-quarter 2009 by posting an earnings growth rate of 95.4%.

The FDA granting the first full U.S. approval to Pfizer (PFE)/BioNTech’s (BNTX) coronavirus vaccine, Comirnaty (BNT162b), has also boosted investors’ confidence.

The full FDA approval is expected to increase the confidence for imposing vaccine mandates. Also, the unvaccinated population is now more likely to opt for vaccinations. According to a CNBC article, the Kaiser Family Foundation survey reflected that three in 10 unvaccinated adults were more likely to get jabbed if one of the vaccines received full approval. The market participants are also upbeat about the chances of peaking delta variant cases.

Investors are also relieved about the Fed’s intention to not hike interest rates in the near term. Also, Fed Chairman Jerome Powell seems to have prepared the market for tapering its $120 billion in monthly bond purchases this year.

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs might gain on improving manufacturing data:

The Industrial Select Sector SPDR Fund XLI

The fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. Its AUM is $19.20 billion and expense ratio is 0.12% (read: How Are Industrial ETFs Reacting to Q2 Earnings?).

Vanguard Industrials ETF VIS                   

This fund offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. Its AUM is $5.44 billion and expense ratio is 0.10% (read: ETFs to Rise on Full FDA Approval for Pfizer COVID-19 Vaccine).

Fidelity MSCI Industrials Index ETF FIDU

The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index. Its AUM is $873.4 million and expense ratio, 0.08% (read: ETFs to Gain as US Industrial Output Rises in July).

iShares U.S. Industrials ETF IYJ

The iShares U.S. Industrials ETF seeks to track the investment results of the Dow Jones U.S. Industrials Index. Its AUM is $1.79 billion and expense ratio is 0.41% as stated in the prospectus.

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Vanguard Industrials ETF (VIS): ETF Research Reports
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
Fidelity MSCI Industrials Index ETF (FIDU): ETF Research Reports
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