Manufacturing recovery boosts European industrials ETFs

Aug 10th, 2015 | By | Category: Equities

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Exchange-traded funds (ETFs) tracking European industrial companies have performed strongly this year as a gradual manufacturing recovery in Europe plus the effects of quantitative easing continue to impact positively on share prices in the sector. The iShares Stoxx Europe 600 Industrial Goods & Services UCITS ETF (EXH4) is up 17% year-to-date. The SPDR MSCI Europe Industrials UCITS ETF (NDUS) and the Amundi MSCI Europe Industrials UCITS ETF (AIND), both tracking the return of the MSCI Europe Industrials Index, have performed similarly well with the index also up 17% year-to-date (as of 10/08/2015).

Strong PMI scores signal continued growth of European industrials ETFs

Manufacturing growth is expected in all countries across Europe except for France and Greece.

Recent surveys of purchasing managers highlight general confidence in the continual expansion of these industrial sectors.

Markit, a leading global provider of financial information services, has released their Purchasing Managers’ Index (PMI) report for July. The report provides an indicator of the health of the global manufacturing sectors of various countries, surveying purchasing managers on key metrics such as new orders, inventory levels, production, supplier deliveries and the employment environment. Purchasing managers are usually privy to the most up-to-date, crucial trade information that most other market participants do not have access to. As such, the report can be a useful analytical tool for ETF investors who may consider investing specifically in the industrials sector of an economy.

The paper presents an index score for each country which can range between 0-100, with a score of 50 indicating unchanged manufacturing growth since the previous measurement. Scores above or below 50 represent growth or contraction of the manufacturing sector respectively.

Europe reported an aggregate score of 52.4, slightly below the index score of 52.5 for June, indicating general growth but a slight drop in momentum. Top performers were the Netherlands (56.0), Italy (55.3), Spain (53.6), the United Kingdom (51.9) and Germany (51.8). France (49.6) dipped slightly below the expansion threshold, while Greece (30.2) recorded a historically low index score. Italy did particularly well, recording the sector’s fastest expansion within the country in over 4 years.

“Momentum continues to build in the Italian manufacturing sector, with the PMI now having risen in six of the past seven months to its highest since April 2011. Production is expanding on all fronts, though particularly sharply in the capital goods sector, in a sign of increasing investment among businesses,” noted Phil Smith, Economist at Markit.

Although the report highlights positive growth in the sector, notable underlying factors included increasing input costs resulting from a relatively weaker euro as well as muted inflation in output prices. There was growth in new orders with strong demand registered in both local and export markets.

Although the extent of the Greece crisis can be seen from their record-low result, there was inconclusive evidence to show that the debt talks had an impact on the manufacturing sectors of any other country within the currency union. Chris Williamson, Chief Economist at Markit commented: “Policymakers will be reassured by the robust growth rates seen in these countries and the resilience of the manufacturing sector as a whole, especially as growth is likely to pick up again now that Greece has jumped its latest hurdle in the ongoing debt crisis.”

The iShares STOXX Europe 600 Industrial Goods & Services UCITS ETF (EXH4), trading in euros on the Deutsche Boerse, offers a broad exposure to the European industrials market, acting as a good proxy for the manufacturing sector. Country exposures are currently geared towards the United Kingdom (26.7%), France (19.2%), Germany (16.2%), Switzerland (10.6%) and Sweden (8.1%). The weighted average PMI of the fund portfolio is currently 51.7, thereby offering investment into an expanding manufacturing sector. Top holdings currently include Siemens (8.7%), ABB (4.9%), Airbus (4.3%), Schneider (4.3%) and Deutsche Post (3.0%). The total expense ratio is 0.46%.

The SPDR MSCI Europe Industrials UCITS ETF (NDUS) and Amundi MSCI Europe Industrials UCITS ETF (AIND) offer exposure to European industrials firms via the MSCI Europe Industrials Index. The country distribution within the index is currently directed towards France (24.5%), the United Kingdom (19.3%), Germany (15.1%), Sweden (10.8%) and Switzerland (10.8%). The most largest individual stock constituents of the index at present are Siemens (8.8%), ABB (4.7%), Airbus (4.3%), Schneider (4.0%) and Deutsche Post (3.1%). The SPDR and Amundi ETFs have total expense ratios of 0.30% and 0.25% respectively.

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