Industrial ETFs Stay Strong After Weak ISM Manufacturing Data

by on June 4, 2013 | ETFs Mentioned:

Between Japanese volatility seeping into U.S. markets and all eyes still trained on the Fed in hopes of some warning before ending its massive bond buying program, global markets are looking for some good news to pull returns back up. Unfortunately, the slew of reports that came in Monday morning had little to do with the pop in global indexes, and even the ETFs affected by these reports have shaken off the bad news [see S&P 500 Visual History].

U.S. Manufacturing Data Fails to Meet Expectations

Is manufacturing activity continuing to decline?The latest national manufacturing report, compiled by the Institute for Supply Management, came in significantly below analysts’ expectations for the third month in a row. Coming in at 49 after a prediction of 50.6, this surprise drop is the largest contraction in four years. Even more worrisome, the ISM uses 50 as the dividing line between growth and contraction, and May’s 49 is the first slip into contraction since June 2009.

Consider the trailing six-month PMI data below and note the steep drop we have seen over the last three months:

This slump in manufacturing coupled with slow growth in U.S. construction spending reports for April should have led to a drop in blue chip and key manufacturing companies’ returns, but so far it seems the industry is willing to shake off these disappointing numbers [see also Companies Increase Dividends: ETFs To Play].

Industrial ETFs Performance Recap

Amid the recent wave of lackluster manufacturing data and sluggish GDP results, Industrial ETFs have been slumping along sideways over the last three months while other sectors have stuck to their steep uptrends to beat out the general maket. Consider the six-month performance of the largest ETF covering the the sector, the Industrial Select Sector SPDR (XLI, A), versus the broad market as represented by the ETF, SPY:

XLI - Exchange Traded Funds - ETF Price Chart for Industrial Select Sector SPDR

click to enlarge

XLI has managed to return over 18% in the last six months, while the broad equity market is lagging slightly behind, returning nearly 16% in the same time period. Until recently, the industrial sector was actually behind the general market, and it is likely that analysts will see this happen again after the poor manufacturing data from May has settled.

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Disclosure: No positions at time of writing.