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The US economy continues to show signs of improvement, reinforcing signs that economic expansion is gaining momentum and an economic recovery is likely sustainable giving positive support to the iShares Dow Jones US Industrials (IYJ), the Vanguard Materials ETF (VAW) and the PowerShares DB Base Metals (DBB).

Most recently, the Institute for Supply Management’s index jumped to a 57 last month from 56.6 in November, indicating yet another consecutive month of expansion. Furthermore, the ISM’s report indicated that US factories reported faster rates of orders and production as booking measures rose to a seven month high in December.

As for the near term future for manufacturers, the chairman of the ISM states that there is still room for inventory replenishment and further gains in manufacturing may dwell from increases in consumer spending and increased demand from the automotive industry. Retailers witnessed the largest holiday sales jump since 2005 and car sales increased to 12.26 million units in November, the highest level since the cash-for-clunkers program implemented by the Federal government to ignite a spark in the US economy. In regards to consumer spending, increases are expected to be supported by the extension of the Bush-era tax cuts and the trimming of payroll taxes, which are both expected to increase disposable income.

As mentioned above, some ETFs likely to be influenced by increasing manufacturing activity include:

  • iShares Dow Jones US Industrials (IYJ), which includes holdings such as industrial conglomerate General Electric (GE), 3M Co (MMM), United Technologies (UTX) and Caterpillar (CAT).
  • Vanguard Materials ETF (VAW), which seeks to track the performance of a benchmark index that measures the investment return of stocks in the materials sector. Top holdings include E.I. du Pont de Nemours & Company (DD), Freeport-McMoRan Copper & Gold (FCX) and Dow Chemical (DOW)
  • PowerShares DB Base Metals (DBB), which holds futures contracts on base metals like copper, aluminum and zinc, all metals that are likely to witness increased demand as manufacturing expands.

Disclosure: No positions

Source: Three ETFs to Play Increased Manufacturing Activity