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Will ETFs Suffer From Lower US Industrial Output in December?

The latest data on U.S. industrial output appears to be disappointing as aggravating COVID-19 cases from the Omicron variant affect the recovering U.S. economy. Per the Fed’s recently-released data, total industrial production decreased 0.1% in December. A 0.3% decline in manufacturing output was observed in December. Going on, there was a 1.5% fall in utility production. Meanwhile, mining production witnessed a 2% gain mainly due to strength in the oil and gas sector.

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 be affected by slowing industrial output.

Total industrial production increased 3.7% from the year-ago figure in December. According to the Fed’s report, the durable and the nondurable manufacturing indexes declined by nearly 0.2%. Moreover, the index for other manufacturing (publishing and logging) slipped 0.8% in December.

Going on, capacity utilization for the industrial sector decreased 0.1% in December to 76.5%. The manufacturing capacity utilization for the industry, which is the measure for studying how efficiently firms are utilizing their resources, slipped 0.2% in December to 77%, per the Fed’s report.

Present U.S. Economic Scenario

Wall Street has been volatile since the beginning of 2022 as 10-year Treasury yields rose. The Federal Reserve has also hinted at taking aggressive measures to manage rising inflation levels. It is expected to begin raising its benchmark interest rate in March. In fact, Goldman Sachs is expecting the Federal Reserve to increase interest rates four times this year, according to a CNBC article.

Certain other factors are clouding the U.S. investment market. Investors are waiting for the fourth-quarter earnings results and the outlook to be presented by corporate America for 2022.

High inflation levels continue to be a serious concern for Americans. Once again, the release of the latest inflation data reports demonstrates the metrics’ touching of record-high levels. The December producer price index increased 9.7% year over year by the recently released reports, coming in at the highest level since 2010. Meanwhile, the metric was up 0.2% over the prior month, better than the Dow Jones estimate of 0.4%.

Per the latest Labor Department report, the Consumer Price Index (CPI) in December rose 7% year over year, on par with the Dow Jones estimate, per a CNBC article. The metric came in at the highest level since June 1982 and covers a basket of products, ranging from gasoline and health care to groceries and rents. It also increased 0.5% for the month, surpassing the 0.4% Dow Jones estimate. The soaring food, shelter and used vehicle prices might be primarily responsible for the higher inflation levels.

Excluding food and energy prices, the core CPI was up 0.6%, worse than the estimate of 0.5%. Annual core inflation also increased at a 5.5% pace compared to the 5.4% expectation and came in at the highest level since February 1991 (per a CNBC article).

The release of certain disappointing economic data releases is also raising concerns. For starters, the ISM Manufacturing PMI in the United States slid to 58.7 in December of 2021 from 61.1 in November, lagging market forecasts of 60. The reading highlighted the weakest growth in factory activity since January due to softness in new orders growth (60.4 vs. 61.5). Going on, the latest jobs report for December looks disappointing. The U.S. economy added 199,000 jobs in December 2021, lagging market estimates of 400,000. Non-farm employment increased by 18.8 million since April 2020 but is still down by 2.3% from its pre-pandemic level in February 2020.

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 $18.63 billion and its expense ratio is 0.12% (read: 4 Sector ETFs to Bet On in 2022).

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 $5.20 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 $919.7 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 $1.73 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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