These are rough times for the cyclical industrial sector. Year-to-date, the Industrial Select Sector SPDR (NYSEARCA:XLI) — the largest of the industrial ETFs by assets — is lower by 10.2% while the S&P 500 is down 0.75%.
So bad are things for industrial ETFs — and the sector at large — that 14 industrial stocks in the S&P 500 are down 20% or more, meaning they are in bear markets. Many of those names are among the primary price action drivers in a slew of industrial ETFs. Still, some analysts remain bullish on the sector.
“Industrial stocks have been battered by trade-war worries and other headwinds in 2018, but the group doesn’t get the credit it deserves, argues UBS,” reports Barron’s. “Where we’re headed: Historically, plenty of industrial stocks have outperformed the S&P 500, and there are still catalysts on the table, says UBS.”
For bold investors willing to wager that a bottom is near for industrial stocks, here are some of the best industrial ETFs to consider.
Invesco S&P 500 Equal Weight Industrials ETF (RGI)
Expense ratio: 0.40% per year, or $40 on a $10,000 investment.
Investors willing to bet on industrial ETFs at a time when the group is struggling may want to consider reduced exposure to the sector’s largest constituents. The Invesco S&P 500 Equal Weight Industrials ETF (NYSEARCA:RGI) helps with objective.
As an equal-weight fund, this industrial ETF is not as dependent on the sector’s large- and mega-cap names as are cap-weighted industrial ETFs. The average market capitalization of RGI’s 69 holdings is $33.08 billion, less than half the $67.34 billion average market value for the stocks held by the aforementioned XLI.
This year, there have been some modest benefits to owning RGI over a cap-weighted equivalent. This industrial ETF has performed slightly less poorly while being a little less volatile than XLI.
Fidelity MSCI Industrials ETF (FIDU)
Expense ratio: 0.0840% per year, or $8.40 on a $10,000 investment.
Investors looking at industrial ETFs as long-term bets should favor the funds with the lowest fees. Enter the Fidelity MSCI Industrials ETF (NYSEARCA:FIDU), which currently is the cheapest industrial ETF on the market, underscoring Fidelity’s growing tradition of low-fee index funds and ETFs.
While FIDU is a low-fee industrial ETF, it is far from a risk-free bet. As a cap-weighted industrial ETF, FIDU is heavily allocated to this sector’s largest components, many of which are downtrodden. FIDU is home to 345 stocks and some of those names are among the 25 large-cap industrial stocks with year-to-date declines of 10% or more.
Another issue plaguing large-cap industrial names is weak oil prices. Some industrial conglomerates, such as General Electric Co. (NYSE:GE), have exposure to oilfield services, an industry with intimate correlations to oil prices.
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 (NYSEARCA:PRN) is an industrial ETF for risk-tolerant investors. This fund targets a struggling sector with an overlay from a struggling investment factor (momentum). As such, PRN is trailing cap-weighted industrial ETFs by wide margins on a year-to-date basis.
PRN’s underlying index “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. “Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe.”
Large- and mega-cap industrial stocks usually do not qualify as momentum names, so PRN tilts away from that segment of the sector. The average market value of this industrial ETF’s 41 holdings is $29.49 billion and just 36% of those holdings are classified as large caps.
VanEck Vectors Environmental Services ETF (EVX)
Expense ratio: 0.55% per year, or $55 on a $10,000 investment.
Some old school industrial companies may not be seen as the most environmentally friendly companies, but the sector has evolved to include companies with some unique and disruptive environmentally sound products and technologies. Consider the VanEck Vectors Environmental Services ETF (NYSEARCA:EVX) is new age industrial ETF.
That said, this industrial ETF is not new; it is over 12 years old. EVX targets the NYSE Arca Environmental Services Index, “which is intended to track the overall performance of companies involved in waste collection, transfer and disposal services, recycling services, soil remediation, wastewater management and environmental consulting services,” according to VanEck.
EVX’s approach is bearing fruit for investors this year. The fund is up 1.6% year-to-date, which, with this volatility, makes it one of 2018’s best-performing industrial ETFs.
Global X U.S. Infrastructure Development ETF (PAVE)
Expense ratio: 0.58% per year, or $58 on a $10,000 investment.
Infrastructure is one of those investment themes that often tantalizes investors only to deliver tepid results. Believe it or not, it is one of the few truly bipartisan political issues and heading into 2019, the Global X U.S. Infrastructure Development ETF (NASDAQ:PAVE) could be a beneficiary congressional split on Capitol Hill.
PAVE tracks the NDXX U.S. Infrastructure Development Index, a benchmark focused solely on domestic infrastructure investments. PAVE is not a pure industrial ETF as some of its approximately 90 holdings hail from other sectors, including materials and technology.
There is an element of tariff sensitivity with this fund as highlighted by its exposure to materials and electrical components makers. PAVE could also use some help from transportation stocks because this industrial ETF allocates over 15% of its weight to railroad operators.
Todd Shriber does not own any of the aforementioned securities.