U.S. Manufacturing Falls in January: Sector ETFs That Stand Out

The ISM Manufacturing PMI dropped to 58.7 in January of 2021 from 60.5 in December which was the highest since August 2018 and below market forecasts of 60. Still, the reading pointed to an eighth successive month of growth in factory activity, which has been increasing at a healthy clip.

A slowdown was noticed in new orders (61.1 versus 67.5), production (60.7 versus 64.7), supplier deliveries (68.2 versus 67.7), inventories (50.8 versus 51) and new export orders (54.9 versus 59.1), per tradingeconomics. On the other hand, both increase in employment (52.6 versus 51.7) and backlog of orders (59.7 versus 59.1) picked up pace and price pressures strengthened (82.1 versus 77.6).

Of the 18 manufacturing industries, 16 recorded growth in January. Below we highlight a few such sectors and their ETFs that won in January.

ETFs in Focus

Computer & Electronic Products – VanEck Vectors Semiconductor ETF (SMH)

The segment has been a big beneficiary of the stay-at-home mandate.“Supplier factory capacity is well utilized.” However, “increased demand, labor constraints and upstream supply delays are pushing lead times. This is more prevalent with international than U.S.-based suppliers,” indicated by the respondents the Computer & Electronic Products division.

Meanwhile, respondents in the Electrical Equipment, Appliances & Components segment indicated that the 5% growth rate in 2020 came in a very challenging year. “2021 is expected to bring growth at a 7-percent or even greater pace. Since semiconductors are used in computer & electronic products as well as several appliances, SMH should be carefully watched.

Metal Products – SPDR S&P Metals & Mining ETF (XME)

Respondents in the Fabricated Metal Products segment indicated that the ongoing business outlook is strong and is running higher than the pre-COVID-19 levels. In early January, the industry players were expecting 20% sales growth for 2021. Respondents in the Primary Metals segment indicated that the business condition is sound but labor shortage is palpable. All these facts must have benefited the metal and mining stocks. XME should thus be tracked closely.

Manufacturing – Vanguard Industrials Index Fund ETF Shares (VIS)

Sales in the machinery segment have been above the pre-COVID level. Respondents said that “business is very good. Customer inventories are low, with a significant order backlog through April. Supply base is struggling to keep up with demand.” However, the miscellaneous machinery segment highlighted that uncertainty will pose a threat through the winter months due to rising infections.

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