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Will ETFs Suffer as US Manufacturing Slows Down in October?

The latest ISM Manufacturing PMI data for the United States looks strained as supply-chain disturbances persist.

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This story originally appeared on Zacks

The latest ISM Manufacturing Purchasing Managers' Index (PMI) data for the United States appears to be decent. The metric stood at 60.8 in October from 61.1 in September but, surpassed forecasts of 60.5, per a Reuters article. Any reading above 50% indicates expansion in U.S. manufacturing activities. 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 October.

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The New Orders Index declined to 59.8%, down 6.9 percentage points from the September reading of 66.7%. The Production Index recorded at 59.3% also slipped 0.1 percentage points from the September reading. The Backlog of Orders Index touched 63.6%, 1.2 percentage points lower sequentially. However, the Supplier Deliveries Index reading was 75.6%, increasing 2.2 percentage points from the September figure.

The manufacturers in the United States are suffering from consistent supply-chain disturbances as globally, the system is under pressure.  According to a Reuters article, supply shortages got severe following a wave of COVID-19 outbreak primarily due to the Delta variant over the summer, particularly in Southeast Asia. Notably, congested ports in China and the United States are also to be partially blamed for the delayed deliveries of materials to factories and retailers.

Commenting on the data, Ryan Sweet, a senior economist at Moody's Analytics in West Chester, has said that "Stress in U.S. supply chains isn't abating, lending downside risk to our forecast for GDP growth in the near term and a clear upside risk to the forecast for inflation," per a Reuters article.

How is the U.S. Economy Presently Placed?

Wall Street had an impressive October following September’s market turmoil. The three major stock indexes — the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite — surged 5.8%, 6.9% and 7.3%, respectively. In September, these three indexes were down 4.3%, 4.8% and 5.3%, respectively.

The S&P 500 and the Nasdaq Composite recorded the best month since November 2020, while the Dow registered the best month since March 2021. In contrast, in September, both the S&P 500 and the Nasdaq Composite recorded the worst monthly decline since March 2020 while the Dow registered its worst monthly performance since October 2020.

Consumer confidence in the United States rose in October primarily on the heels of easing Delta variant concerns, improving labor market conditions, rebounding U.S. economy from the pandemic-led slump and accelerated coronavirus vaccine rollouts. The Conference Board's measure of consumer confidence index stands at 113.8 in comparison to 109.8 in September. The metric has finally broken the streak of three consecutive monthly declines. October’s reading also beat the consensus estimate of the metric, coming in at 108.3, per a Reuters’ poll. The metric continues to be below the pre-pandemic level of 132.6 in February 2020.

Consumers seem to be looking to buy homes, motor vehicles and major household durables. In fact, the buying attitude for vehicles and homes is expanding. The survey also showed that the proportion of the population planning to go on vacation has shot up to the highest level since February 2020, as mentioned in a Reuters article.

Meanwhile, U.S. GDP growth came in at 2.0% for the third quarter, missing the expectations of 2.8%. The reading disappoints in comparison to 6.7% growth witnessed in the second quarter.

Also, the minutes from the Federal Open Market Committee’s September meeting highlighted that the Fed might begin tapering the fiscal stimulus support program from mid-November.

The central bank is expected to roll back the month-end bond purchases by cutting $10 billion of $80 billion a month in Treasuries and $5 billion from $40 billion a month in mortgage-backed securities (per a CNBC article). If everything goes well, the Federal Reserve expects to finish off tapering by mid-2022.

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs that might get impacted from the slowdown in US manufacturing activities:

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 $17.77 billion and expense ratio is 0.12% (read: ETF Strategies to Cheer the Market Momentum in October).

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 $5.17 billion and 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. Its AUM is $855.5 million and 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. Its AUM is $1.65 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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