Industrial ETFs in Focus as Philly Manufacturing Index Falls

After 11 straight declines in factory gauge, should we worry now or hold off?

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Reviewed by: Lisa Barr
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Edited by: Ron Day

The Philly Fed manufacturing index’s 11-straight declines suggests that trouble, if it hasn’t already brewed, is on the way to being served up. 

The nearly full year of drops reported last week—for the area including Eastern Pennsylvania, Southern New Jersey and Delaware—signals that the forward-looking view of the manufacturing sector of the U.S. economy may still be a drag on growth. Still, the economy appears to be robust for now. 

Consumers’ current habit of buying with both fists may change come autumn. That’s what manufacturers are saying via their actions: holding back on producing goods out of concern that they won’t be bought with the type of vigor and outright desperation that has characterized the postpandemic economy. 

For some ETF investors, that may be a reason to keep stock exposure close to the vest, since signs of a slowdown have emerged. This suggests a cloud may pass over companies in the industrials sector.   

That only matters if the market cares, and for some time now, the market has not cared about what happens later. It sees stock prices rising and nontech sectors starting to finally get up off the ground after lagging megacap technology stocks, and essentially block any dire warnings about the future. And really, with the way the market is quickly broadening out to include the industrial sector, can we blame them? 

With that in mind, here are some industrial sector ETFs that are built to take advantage of the recent awakening of that market segment, with the Philly Fed’s trend representing a “gloom doomer’s” attitude they prefer to ignore for a while.   

Industrial ETFs  

The iShares US Industrials ETF (IYJ) launched in 2000, has accumulated $1.23 billion in assets and holds 182 stocks. However, 34% of the portfolio is currently made up of the top 10 names, so investors get a dash of concentration. Also, since IYJ selects from the Russell 1000 Index, it is not simply a large cap ETF. 

The First Trust RBA American Industrial Renaissance ETF (AIRR) has been a performance leader in the sector in 2023, up more than 24%. This fund was created and is overseen by well-known market strategist and TV pundit Richard Bernstein. The $503 million ETF is passively managed, but it screens for stocks with a positive 12-month forward earnings consensus estimate. Translation: No company allowed if it is expected to be unprofitable. 

The Invesco S&P Small Cap Industrials (PSCI) fits the tag “undiscovered” like many smaller cap sector ETFs. This 13-year old, $134 million offering starts with the S&P Smallcap 600, which is considered a much higher quality group of stocks than the more popular Russell 2000 Index. It whittles those down to a portfolio that is currently at 94 holdings, with an average market capitalization of $2.5 million, and no stock holding currently a weighting greater than 3.4%. 

So, is the Philly Fed flashing a warning sign? Or, like tech and other sectors, are investors choosing to enjoy the ride now, and worry about the risks later? For those who identify with the latter sentiment, ETFs offer a diverse, intriguing set of ways to follow along in this suddenly expanding market.  

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.