3 ETFs To Watch On Weak Industrial Data

By | June 17, 2015

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The U.S. economy is growing at a slower pace after the first-quarter slump. Though an accelerating job market, recovering housing fundamentals, and rising consumer confidence are propelling growth in the economy, manufacturing and industrial activities are lagging far behind. This is especially true if we go by the latest sluggish data, which shows that manufacturers are being held back by a strong dollar, deep spending cuts by oil and gas drillers and weak demand. Industrial Activity in Downslide Industrial production surprisingly dropped 0.2% in May, marking slowdown for six consecutive months. The figure was nowhere closer to the last 4.8% growth seen in November. Manufacturing, which accounts for 12% of the U.S. economy and more than 72% of industrial production, also slid 0.2% last month while mining production fell 0.3%, marking the fifth straight monthly decline. Meanwhile, industrial capacity utilization inched down from 78.3% in April to 78.1% in May. A separate report on June 2015 – Empire State Manufacturing Survey – shows that business conditions have deteriorated for New York manufacturers. Notably, the Empire State general business conditions index shrank to minus 1.98 in June from plus 3.09 in May, representing the weakest reading since January 2013 and the second negative reading in the past three months. Further, the six-month outlook index worsened to the lowest level since January 2013 to 25.8 in June from 29.8 in May. According to the Markit data, U.S. Manufacturing Purchasing Managers’ Index (PMI) slightly fell to 54 from 54.1 in April while U.S. Services Business Activity Index slipped to 56.2 from 57.4. The U.S. Composite PMI Output Index (covering manufacturing and services) was 56 in May, down from 57 in April and new business volumes increased at the slowest pace in almost one and a half years. Weak Trend to Continue Overall, industrial sector activities will likely remain weak in the coming months, as a strong U.S. dollar has been the major culprit. The Fed is preparing for interest rates hike in contrast to other developed and developing nations that are extending their monetary easing policies. The divergent path will continue to bolster the U.S. dollar against a basket of major currencies, making exports less competitive and thereby hurting sales and profit margins of the big American firms. This puts U.S. factories at a greater disadvantage against foreign rivals. ETFs to Watch Given this, some investors may want to take a closer look at the industrial ETFs. While industrial ETFs have been laggards for most of this year so far, some are standing tall in the current softness and are expected to keep up their momentum in the coming months. Further, these funds have a favorable Zacks Rank of 2 (Buy) or 3 (Hold), suggesting smooth trading ahead. iShares U.S. Industrials ETF (NYSEARCA: IYJ ) This product provides exposure to 213 industrial stocks by tracking the Dow Jones U.S. Industrials Index. It is heavily concentrated on the top firm – General Electric (NYSE: GE ) – with 10.24% of assets while others make up for less than 3.8% share. Further, the ETF is tilted toward capital goods’ companies at 61.1% while transportation and software services round off the next two spots with double-digit exposure each. The fund has an AUM of $744.7 million and average daily volume of around 109,000 shares. Expense ratio came in at 0.43%. The product has gained nearly 1.5% in the year-to-date time frame and has a Zacks ETF Rank of 3 with a Medium risk outlook. First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) This fund follows the StrataQuant Industrials Index, which uses AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index and ranks the stocks on both growth and value factors. Then, the bottom 75% stocks are eliminated from inclusion. The approach results in a basket of 103 securities, which are widely spread out across components with none holding more than 2.13% of assets. In terms of industrial exposure, machinery and aerospace & defense take the top two spots at 24.6% and 14.1%, respectively, while others make up for single-digit allocation each. The fund is rich in AUM of $459 million and sees good trading volume of about 208,000 shares a day. It charges a bit higher annual fee of 67 bps and is up 0.7% so far in the year. FXR has a Zacks ETF Rank of 2 with a Medium risk outlook. Fidelity MSCI Industrials Index ETF (NYSEARCA: FIDU ) This fund tracks the MSCI USA IMI Industrials Index, holding 346 stocks in its basket. Like IYJ, it is concentrated on GE at 11.4% while other firms hold less than 4.2% share. Here, aerospace and defense industry is the top sector with nearly one-fourth of the portfolio, followed by industrial conglomerates (18.8%) and machinery (17.4%). The product has amassed $159.7 million in its asset base while trades in good volume of more than 70,000 share a day on average. It is one of the low cost choices in the space, charging 12 bps in annual fees from investors. The fund added 0.6% in the year-to-date period and has a Zacks ETF Rank of 2 with a Medium risk outlook. Link to the original article on Zacks.com Scalper1 News

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