Investors are rarely excited by the industrial sector. Unfortunately, when it comes to sheer performance in 2018, industrial ETFs are living up to that less-than-thrilling billing. As of Oct. 3rd, the Industrial Select Sector SPDR (NYSERCA:XLI), the largest industrial exchange traded fund (ETF) by assets, is up 6.5% year-to-date, well behind the 10.7% returned by the S&P 500.
XLI is a diversified industrial ETF, one that features exposure to a dozen of the industrial sector’s sub-industry groups. For investors, that trait is relevant because while broader industrial ETFs are lagging, some more focused industry funds related to the sector are thriving.
Industrial ETFs are also worth considering in the near term because third-quarter earnings season is about to kick off in a big way. The Industrial Select Sector Index, XLI’s underlying index, sees about three-quarters of its holdings report third-quarter results between Oct. 15th and Oct. 26th.
Here are some industrial ETFs that could be valid near-term plays for short-term investors and solid ideas for more conservative, long-term investors.
Fidelity MSCI Industrials ETF (FIDU)
Expense ratio: 0.0840% per year, or $8.40 on a $10,000 investment.
For investors willing to bet on rebounds for diversified industrial ETFs, that bet could require some patience. So if an industrial ETF is going to be a long-term holding in an investor’s portfolio, it would be advisable to seek out low-fee products. The Fidelity MSCI Industrials ETF (NYSEARCA:FIDU) is the least expensive industrial ETF on the market and additional cost savings can be realized by trading INDU on Fidelity’s commission-free ETF platform.
FIDU holds 343 stocks, a significantly larger basket than XLI, but both industrial ETFs are heavily allocated to the likes of Boeing (NYSE:BA), 3M (NYSE:MMM), Honeywell International (NYSE:HON) and laggard General Electric (NYSE:GE).
Currently, analysts have “buy” ratings on 53% of S&P 500 industrial stocks and “hold” ratings on 42%, numbers that are inline with the S&P 500 itself.
iShares U.S. Aerospace & Defense ETF (ITA)
Expense ratio: 0.43% per year, or $43 on a $10,000 investment.
Investors looking for strength among industrial ETFs do not need to look any further than aerospace and defense funds such as the iShares U.S. Aerospace & Defense ETF (CBOE:ITA). ITA, which tracks the Dow Jones U.S. Select Aerospace & Defense Index, is up more than 16% year-to-date, easily outpacing traditional industrial ETFs.
ITA holds 37 stocks with just over 20% of its combined weight assigned to Dow components Boeing Co. and United Technologies Inc. (NYSE:UTX). Earnings test loom for this industrial ETF and its rivals between Oct. 22nd and Nov. 2nd when over 70% of the Dow Jones U.S. Select Aerospace & Defense Index delivers results.
ITA looks like a top heavy ETF, but in this case, that is not a major concern because six of the seven largest defense contractors garner over 22% of government contracts, so this industrial ETF’s component heft can work in favor of investors.
Invesco DWA Industrials Momentum ETF (PRN)
Expense ratio: 0.60% per year, or $60 on a $10,000 investment.
The Invesco DWA Industrials Momentum ETF (NASDAQ:PRN) is approaching its 12th birthday, meaning it has long been one of the go-to options for investors looking an industrial ETF that does not weight stocks by market capitalization.
This industrial ETF targets the Dorsey Wright Industrials Technical Leaders Index, which “is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 securities from the NASDAQ US Benchmark Index,” according to Invesco.
With relative strength being a key element to this industrial ETF’s weighting methodology, it is not surprising that PRN’s largest industry weight is aerospace and defense at just over 20%. Nor is it surprising, when taking the relative strength element into account, that PRN currently does not feature General Electric on its roster, which is a point favor of this industrial ETF.
Invesco S&P 500 Equal Weight Industrials ETF (RGI)
Expense ratio: 0.40% per year, or $40 on a $10,000 investment.
There are times when equal-weight sector ETFs outperform cap-weighted counterparts. That is not happening among industrial ETFs this year as the Invesco S&P 500 Equal Weight Industrials ETF (NYSEARCA:RGI) — the equal-weight answer to funds like FIDU and XLI — is up just 5%.
In the current environment, the biggest strike against RGI is its underweight position in aerospace and defense stocks relative to cap-weighted industrial ETFs. RGI’s aerospace and defense weight is 18.87% compared to 20.43% in XLI.
RGI could be an appealing wager for investors willing to bet on a mid-cap industrial resurgence because mid caps represent 40% of this industrial ETF’s weight.
Direxion Daily Transportation Bull 3X Shares (TPOR)
Expense ratio: 1.02% per year, or $102 on a $10,000 investment.
No, leveraged ETFs are not intended for use by long-term investors. However, the Direxion Daily Transportation Bull 3X Shares (NYSEARCA:TPOR), the king among leveraged transportation ETFs, offers opportunity for short-term traders.
This leveraged industrial ETF attempts to deliver triple the daily returns of the Dow Jones Transportation Average, meaning TPOR is a triple-leveraged bet on railroad operators, freight and logistics providers and airlines.
“Given economic indicators like steadily rising GDP growth and strong consumer sentiment, as well as limited direct exposure to Chinese markets, transport stocks like the above as well as FedEx and UPS will likely see strong results in the upcoming earnings season,” said Direxion in a recent note.
Global X U.S. Infrastructure Development ETF (PAVE)
Expense ratio: 0.47% per year, or $47 on a $10,000 investment.
Some infrastructure ETFs have lengthy track records, but the legacy funds in this group have drawbacks, including concentrated sector exposures that are not always levered to infrastructure and not enough concentration the domestic infrastructure spending theme.
The Global X U.S. Infrastructure Development ETF (NASDAQ:PAVE), which debuted in March 2017, addresses those issues. As its name implies, this industrial ETF focuses on U.S. infrastructure investments and spending, issues that often find way their way to the forefront of federal and local politics. PAVE holds 93 stocks, of which two-thirds are industrial names.
Infrastructure is big business and the U.S. needs to spend a massive amount of money in the coming years to shore up aging and failing airports, bridges, railways and roads.
Invesco Water Resources ETF (PHO)
Expense ratio: 0.62% per year, or $62 on a $10,000 investment.
Water ETFs are industrial ETFs and one of the largest is the Invesco Water Resources ETF (NASDAQ:PHO). The $867.6 million PHO targets the NASDAQ OMX US Water Index.
That benchmark “seeks to track the performance of US exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries,” according to Invesco.
An advantage of PHO relative to traditional industrial ETFs is that the water fund can be less volatile. Over the past year, PHO has been significantly less volatile than standard industrial ETFs like FIDU and XLI. PHO is doing that with about two-thirds of its 35 holdings being mid- and small-cap stocks.
PHO is a top-heavy industrial ETF as its top five holdings combine for over 40% of the fund’s weight.
Todd Shriber does not own any of the aforementioned securities.