American economy has been on a faster growth trajectory as depicted by rounds of encouraging data in recent months. The latest upbeat industrial production data bolstered the upbeat mood amid the US-China trade tariff chaos.

This is especially true as industrial production (a measure of output at factories, mines and utilities) rose 0.4% in August – the third consecutive month of increase – thanks to robust growth in manufacturing, mining and utilities output. With this, industrial production seems to be on track for its strongest annual growth since 2010, climbing 4.9% over the past 12 months (see: all the Industrial ETFs here).

Manufacturing output inched up 0.2% in August driven by a 4% rise in motor vehicles and parts. Automakers assembled vehicles at an annual rate of 11.54 million units — the strongest pace since April. Meanwhile, utilities output advanced 1.2% driven by a surge in electricity usage during the hot month while mining output rose 0.7% on higher production of oil and natural gas.

Overall industrial capacity utilization (a measure of how fully firms are using their resources) increased from 77.9% in July to 78.1% in August – the highest rate since April and below pre-recession levels of above 80%.

 

Solid Outlook

The manufacturing sector, which accounts for about 75% of the U.S. industrial production, has been gaining momentum since the start of 2017 on rising energy prices and historic tax cuts. The modest gain in August indicates tough time for manufacturers, who are struggling with a strong dollar, plateauing housing sector and rising trade tensions. Notably, a strengthening dollar is making U.S. products more expensive abroad and is likely to weigh on the growth of factories in the coming months as well.

Additionally, the shortage of workers could also pose a risk to production and the tit-for-tat tariff threats suggest some crunch in the supply chain. Trump’s tariffs on imported steel and aluminum are raising costs for many manufacturers, taking a toll on the outlook for the industrial sector. He has already implemented tariff on $50 billion in Chinese goods leading to retaliation of the equivalent amount from China. He has threatened another $200 billion in tariffs as early as Sep 17 and the counterattack is expected from China once announced. Trump is also planning the third round of tariffs on an additional $267 billion of goods at a short notice (read: Trade-Sensitive Sector ETFs & Stocks to Watch on Talk Hopes).

Nevertheless, the headwinds are outweighed by accelerating economic growth and strong earnings optimism. U.S. GDP growth expanded 4.2% annually in the second quarter, representing the fastest pace of growth in nearly four years. The massive $1.5 trillion fiscal stimulus plan and tax overhaul have been acting as major catalysts, outplaying trade war related concerns. Earnings at the industrial sector are expected to grow 24.2% this year from 18.7% last year. Moreover, Industrials has a strong Zacks Sector Rank (top 25%).

Given the solid outlook amid trade risk, investors could tap the sector with the following ETFs & stocks that have solid Zacks Rank #1 (Strong Buy) or #2 (Buy). For stocks also, we have screened for VGM Score of A or B also:

Invesco DWA Industrials Momentum ETF PRN

This fund provides exposure to 40 companies by tracking the Dorsey Wright Industrials Technical Leaders Index. It is well balanced across each security with none accounting for more than 4.51% share in the basket. In terms of industrial exposure, aerospace and defense, road & rail, and building products make up the top three. The fund has amassed $122.6 million in its asset base and charges 60 bps in annual fees. It trades in average daily volume of 5,000 shares and has a Zacks ETF Rank #2 with a Medium risk outlook.

Industrial Select Sector SPDR XLI

This is the most popular ETF in the space with AUM of $13.5 billion and an average daily volume of nearly 11.9 million shares. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with relatively higher concentration on the top firm – Boeing (BA). About 27.3% of the assets is allocated to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit share each. This ETF charges 13 bps in fees per year and has a Zacks ETF Rank #2 with a Medium risk outlook.

Fidelity MSCI Industrials Index ETF FIDU

This fund tracks the MSCI USA IMI Industrials Index, holding 343 stocks in its basket with none accounting for more than 6.5% share. Aerospace & defense makes up the top sector with one-fourth of the portfolio, followed by machinery (18.8%) and industrial conglomerates (13%). The product has amassed $510.1 million in its asset base while trading in good volumes of around 124,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank #2 with a Medium risk outlook.

Vanguard Industrials ETF VIS

This fund follows the MSCI US IMI Industrials 25/50 Index and holds about 351 securities in its basket with none accounting for more than 6.4% of the assets. From an industrial look, aerospace and defense takes the top spot at 23.6% followed by industrial conglomerates at 13.1%. The fund manages $4 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as the product exchanges 117,000 shares a day on average. VIS has a Zacks ETF Rank #2 with a Medium risk outlook (read: Time to Buy Industrial ETFs on Value?).

Donaldson Company Inc. DCI

The company is a leading worldwide provider of filtration systems and replacement parts. Its earnings estimates were revised upward by 10 cents for the fiscal year (ending August 2019) in the last 30 days. The stock has an estimated earnings growth rate of 18.50%. Donaldson currently carries a Zacks Rank #2 and has a VGM Score of B.

W.W. Grainger Inc. GWW

It is the leading broad line supplier of facilities maintenance products serving businesses and institutions throughout North America. The stock saw positive earnings estimate revision of a couple of cents for this year in the last 30 days and has an estimated growth rate of 40.05%. It has Zacks Rank #1 and a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

UFP Technologies Inc. UFPT

It designs and manufactures a range of high-performance cushion packaging and specialty foam and plastic prods. for the industrial and consumer markets. UFP Technologies saw solid earnings estimate revision of nine cents for this year in the last 30 days with an estimated growth rate of 56%. It has a Zacks Rank #2 and a VGM Score of A.

Global Brass and Copper Holdings Inc. BRSS

This is a converter, fabricator, distributor and processor of copper and brass products primarily in North America. It saw its earnings estimate rise 19 cents for this year in the last 30 days and has an expected growth rate of 14.75%. The stock carries a Zacks Rank #1 and has a VGM Score of A.

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