US Industrial Production Beats Expectations: ETFs in Focus

U.S. Industrial production increased more than expected in December, as extreme winter in the East and Mid-Western United States increased demand for heating, thus pushing up utility production. Utility production increased 5.6% in December, the highest since March 2017.

Into the Headlines

Factory production in the U.S., which accounts for more than 70% of industrial output, increased a mere 0.1% in December. A 1.5% drop in production of primary metals caused factory production to slow.

Industrial production locked in a strong performance toward the end of 2017, as the impact of hurricanes Harvey and Irma faded. Moreover, improving global trade outlook and a weaker dollar also contributed to the strong production number (read: 3 Sector ETFs & Stocks to Sizzle Despite Downbeat Job Data).

Per the Federal Reserve, industrial production in the U.S. increased 0.9% in December compared with 0.1% decline in the prior month, and surpassing expectations of a 0.4% rise. Moreover, overall industrial production, including manufacturing, mining and utilities increased 3.6% in 2017, the best annual performance since 2010 (read: 6 Dow Stocks That Should Drive These ETFs Higher).

Economic Scenario

United States’ GDP grew 3.2% in the third quarter compared with 3.1% in the previous quarter. Although the third quarter reading was below market expectations of 3.3%, it was the highest since first-quarter 2015. U.S. retail sales grew 4.2% in 2017 compared with 3.2% in 2016, showing signs of a strengthening economy.      

Moreover, Trump’s tax reform is expected to significantly benefit U.S. companies. Strong production data supports the market’s expectations of a rate hike by the Fed in the March FOMC meeting. Per the CME Fed Watch tool, markets believe there is a 72.6% chance of a 25 basis point rate hike and a 1.1% chance of a 50 basis point rate hike on the Mar 21, 2018 FOMC meet.

Let us now discuss a few ETFs focused on providing exposure to U.S. Industrial equities (see all Industrial ETFs here).

Industrial Select Sector SPDR Fund XLI

This fund is one of the most popular U.S. equity ETFs and focuses on providing exposure to the U.S. industrial sector.

It has AUM of $15.4 billion and charges a fee of 14 basis points a year. From a sector look, Aerospace & Defense , Machinery and Industrial Conglomerates take the top three spots, with 25.7%, 18.4% and 16.3% allocation, respectively (as of Dec 31, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co BA, 3M Co MMM and Honeywell International HON with 7.8%, 5.8% and 4.8% allocation, respectively (as of Jan 17, 2018). The fund has returned 29.8% in a year. XLI has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Industrials ETF VIS

This ETF is a pure play on the U.S. industrials sector.

It has AUM of $3.9 billion and charges a fee of 10 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Industrial Machinery take the top three spots, with 22.3%, 14.4% and 11.0% allocation, respectively (as of Dec 31, 2017). From an individual holdings perspective, the fund has high exposure to Boeing Co, General Electric GE and 3M Co with 5.4%, 5.0% and 4.6% allocation, respectively (as of Dec 31, 2017). The fund has returned 26.9% in a year. VIS has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Industrials ETF IYJ

This ETF is a relatively costly bet on the U.S. industrial sector.

It has AUM of $1.3 billion and charges a fee of 44 basis points a year. From a sector look, Capital Goods, Software & Services and Transportation take the top three spots, with 57.6%, 13.3% and 12.7% allocation, respectively (as of Jan 16, 2018). From an individual holdings perspective, the fund has high exposure to Boeing Co, General Electric and 3M Co, with 5.3%, 4.4% and 4.1% allocation, respectively (as of Jan 16, 2018). The fund has returned 29.5% in a year. IYJ has a Zacks ETF Rank #3 with a Medium risk outlook.

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Boeing Company (The) (BA) : Free Stock Analysis Report
 
3M Company (MMM) : Free Stock Analysis Report
 
Honeywell International Inc. (HON) : Free Stock Analysis Report
 
General Electric Company (GE) : Free Stock Analysis Report
 
VIPERS-INDUS (VIS): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
ISHARS-US INDU (IYJ): ETF Research Reports
 
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