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Will ETFs Gain From Improving US Industrial Output in January?

The latest data on U.S. industrial output seems to be encouraging amid improving labor market and easing pandemic conditions. Per the Fed’s recently-released data, total industrial production rose 1.4% in January. A 0.2% rise in manufacturing output compared favorably with a revised decline of 0.1% in December. Going on, there was a 9.9% jump in utility production. The dropping temperature in January led to an increased demand for heating. Moreover, mining production witnessed a 1% gain mainly on strength in the oil and gas sector.

– Zacks

Considering the latest data release, investors can track ETFs like The Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF (VIS), Fidelity MSCI Industrials Index ETF (FIDU) and iShares U.S. Industrials ETF (IYJ), which might gain from improving industrial output.

Total industrial production increased 4.1% from the year-ago figure in January. According to the Fed’s report, the durable and the nondurable manufacturing indexes along with the other manufacturing (publishing and logging) inched up nearly 0.2% each.

Going on, capacity utilization for the industrial sector rose 1% in January to 77.6%. The manufacturing capacity utilization for the industry, which is the measure for studying how efficiently firms are utilizing their resources, increased 0.1% in January to 77.3%, which is 1.8 percentage points above its pre-pandemic level, per the Fed’s report.

Present U.S. Economic Scenario

Market gyrations have been a common phenomenon in 2022. After some rally so far in February, major broader indices continue ending in the red due to red-hot inflation readings and intensifying geopolitical tensions. A solid fourth-quarter earnings season and an improving labor market helped keep market participants upbeat.

Global markets are again hurt by the escalating tensions between Russia and Ukraine on Feb 17. This led to an increase in oil prices as well. The market participants were already dealing with red-hot inflation readings as the consumer price index (CPI) jumped 7.5% year over year in January, marking the largest 12-month gain since February 1982. The high inflation has set the stage for the first interest rate hike as soon as March.

The core inflation index, which excludes volatile components such as food and energy prices, rose 6% year over year, marking the highest growth since August 1982. Energy prices remained a key contributor to the inflation numbers, with a 27% year-over-year increase.

U.S. consumers are feeling the heat of the continuously rising inflation levels. The University of Michigan’s preliminary consumer sentiment dropped to 61.7 in early February from a final reading of 67.2 last month. The metric, which witnessed the lowest level since October 2011, lagged the market forecast of a slight rise to 67.5, per the Reuters survey on economists.

Meanwhile, the strong jobs report for January has supported some market optimism. The U.S. economy added 467,000 jobs in January 2022, surpassing market expectations of a rise of 150,000. The upside was largely driven by easing business restrictions amid the reopening of economies and accelerated coronavirus vaccine rollout. January figures stood out to be pleasantly surprising as the Omicron coronavirus variant weighed on the jobs market. The ADP report also showed that private companies cut 301,000 jobs.

The improving jobs report also signals a higher possibility of the Federal Reserve hiking the benchmark interest rates in March. This is preparing investors for the upcoming rate hike, supporting market movements.

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs that have relatively high exposure to industrial companies:

The Industrial Select Sector SPDR Fund XLI           

The Industrial Select Sector SPDR Fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. The Industrial Select Sector SPDR Fund has AUM of $16.53 billion and its expense ratio is 0.10% (read: How Are Industrial ETFs Reacting to Mixed Q4 Earnings?).

Vanguard Industrials ETF VIS                   

Vanguard Industrials ETF offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. Vanguard Industrials ETF manages an AUM of $4.60 billion and its expense ratio is 0.10%.

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. Fidelity MSCI Industrials Index ETF has AUM of $835.5 million and its expense ratio, 0.08%.

iShares U.S. Industrials ETF IYJ

The iShares U.S. Industrials ETF seeks to track the investment results of the Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index. iShares U.S. Industrials ETF has AUM of $1.51 billion and its 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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