Can Industrial ETFs Shine Bright on Vaccine Optimism in 2021?

Sweta Jaiswal, FRM
·4-min read

The industrial sector, which faced disruption in global supply chains and factory closedowns, is expected to gain on recovery from the coronavirus-led slowdown. The launch of a coronavirus vaccine and introduction of additional stimulus are expected to drive demand and economic activities in the sector.

Also, the latest Institute for Supply Management (ISM) Manufacturing PMI data for the United States is painting an impressive picture for the sector. The metric rose to 60.8 in February 2020 from 58.7 in January and surpassed forecasts of 58.8, per a Reuters article. Notably, the manufacturing sector, which makes up 11.9% of the U.S. economy, rose to a three-year high level in February (per the same article). According to the ISM, February’s rise in manufacturing activity marks the ninth straight month of gains for the space.

Other indexes within the PMI like the New Orders Index increased 3.7% from January to 64.8%. The Production Index rose 2.5% to 63.2% from January’s reading of 60.7%. The Employment Index rose 1.8% to a reading of 54.4% from 52.6% in January.

What Does 2021 Hold for the Sector?

Studying the present market scenario regarding the positive developments in the additional round of fiscal stimulus and coronavirus vaccine development, it seems that Wall Street will witness a rally in March. Recently, the House of Representatives passed President Joe Biden’s $1.9-trillion stimulus package, also known as the American Rescue Plan Act of 2021.

On the vaccine front, the world will now receive the first single-shot vaccine in the battle against the coronavirus pandemic as the FDA awarded the Emergency Use Authorization (EUA) to COVID-19 vaccine that is developed by the Janssen Pharmaceutical Companies of Johnson & Johnson (JNJ). Going on, Merck & Co., Inc. (MRK) has signed multiple agreements to make available its existing manufacturing facilities for the development of COVID-19 vaccines and medicines after its own efforts to create vaccines failed. It has signed a deal with J&J to support manufacturing of the latter’s single-shot COVID-19 vaccine.

Moreover, Biden has informed that the United States currently projects to have sufficient COVID-19 vaccines for all adults who want to get vaccinated by the end of May, per a YahooFinance article.

Amid the pandemic, the central bank has pledged to hold rates at a near-zero level and will continue with the asset purchase program at the current rate until “substantial further progress” is made to reach a state of healthy inflation and maximum employment levels. Also, according to a CNBC article, Federal Reserve Chairman Jerome Powell recently said that a “patiently accommodative” monetary policy is needed to support the economy after observing the sluggish labor market conditions.

Thus, the new trench of coronavirus-aid package, an ultra-dovish monetary stance maintained by the Fed and record low benchmark interest rate of 0-0.25% are making a stronger case in favor of the industrial sector in 2021.

Industrial ETFs to Watch Out

Against this backdrop, investors can still keep a tab of the following ETFs (see all industrial ETFs here):

The Industrial Select Sector SPDR Fund XLI

The fund tracks the Industrial Select Sector Index (read: U.S. Manufacturing at 3-Year High: ETFs in Focus).

AUM: $17.38 billion

Expense Ratio: 0.12%

Vanguard Industrials ETF VIS

The fund tracks the MSCI US Investable Market Industrials 25/50 index (read: Industrial ETFs to Gain as US Manufacturing Picks Up Amid Coronavirus).

AUM: $4.41 billion

Expense Ratio: 0.10%

iShares U.S. Industrials ETF IYJ

The fund tracks the Dow Jones U.S. Industrials Index (read: Can Industrial ETFs Gain Despite Mixed Q4 Earnings?).

AUM: $1.44 billion

Expense Ratio: 0.42%

Fidelity MSCI Industrials Index ETF FIDU

The fund tracks the MSCI USA IMI Industrials Index.

AUM: $654.9 million

Expense Ratio: 0.08%

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