Give the industrial sector and the related industrial ETFs some credit. Against the backdrop of recent struggles in shares of Boeing Co. (NYSE:BA), one of the sector’s marquee components, industrial ETFs are holding up pretty well.
Year-to-date, the Industrial Select Sector SPDR (NYSEARCA:XLI), the largest industrial ETF by assets, is up 14.20%, topping the S&P 500 by about 210 basis points in the first quarter. XLI currently allocates 8.93% of its weight to shares of Boeing, making the aerospace and defense giant by far the industrial ETF’s largest holding.
Impressive as many of the performances by industrial ETFs this year, investors arriving late to this party should exercise caution.
“Brad Sorensen, managing director of market and sector analysis at Charles Schwab, told MarketWatch that industrial stocks’ rise ‘has gone too far, in part because the market is overly optimistic as to what the China trade deal will be,’” reports MarketWatch.
For investors willing to take on some risk in the immediate term, some of the following industrial ETFs could be rewarding bets for the second quarter.
iShares U.S. Aerospace & Defense ETF (ITA)
Expense ratio: 0.43% per year, or $43 on a $10,000 investment.
Some market segments are often beholden to Capitol Hill. That can be good or bad depending on the industry in question. For the aerospace and defense industry, politics have been rewarding over the past several years. The iShares U.S. Aerospace & Defense ETF (CBOE:ITA), the largest aerospace and defense ETF, is up 71.20% over the past 36 months, easily topping traditional industrial ETFs and the S&P 500 over that period.
While ITA has recently been hampered by Boeing’s slide (the stock accounts for 20.62% of the fund’s weight), this industrial ETF is a valid play on defense spending, which is trending higher. President Trump is proposing a fiscal-year 2020 defense budget of a staggering $750 billion.
Investors considering ITA should note the following: this industrial ETF is a cap-weighted fund and is extremely top heavy. Boeing and fellow Dow component United Technologies Inc. (NYSE:UTX) combine for nearly 38% of the fund’s weight, meaning those two stocks are the primary drivers of ITA’s price action.
Invesco SmallCap Industrials ETF (PSCI)
Expense ratio: 0.29%.
Many investors think of industrial ETFs through the large-cap lens, but the Invesco SmallCap Industrials ETF (NASDAQ:PSCI) proves there are opportunities with this sector’s smaller constituents. PSCI follows the S&P SmallCap 600 Capped Industrials Index, the industrial offshoot of the S&P SmallCap 600 Index.
The average market capitalization of PSCI’s 97 holdings is $1.76 billion, putting this fund on the higher end of the small-cap spectrum. Thirteen industry groups are represented in this small-cap ETF, which is up nearly 11% this year.
While the industrial sector is usually considered a value or quality play, not a growth destination, PSCI has more of a growth feel to it, which is to be expected with a small-cap fund. This industrial ETF allocates 40.38% of its weight to growth stocks — more than double its weight to value stocks.
Invesco DWA Industrials Momentum ETF (PRN)
Expense ratio: 0.60%.
Most traditional industrial ETFs are cap-weighted funds, but there is always another way of approaching weighting methodologies in the fund universe. The Invesco DWA Industrials Momentum ETF (NASDAQ:PRN) brings momentum to the industrial ETF table.
PRN, which turns 13 years old later this year, follows the Dorsey Wright Industrials Technical Leaders Index and holds 38 stocks.
“The 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. 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,” according to Invesco.
PRN’s weighting scheme makes this industrial ETF a growth fund as nearly 80% of the fund’s holdings are classified as growth stocks.
Global X U.S. Infrastructure Development ETF (PAVE)
Expense ratio: 0.47%.
The Global X U.S. Infrastructure Development ETF (CBOE:PAVE) is not a dedicated industrial ETF, but it is an interesting thematic fund with ample exposure to industrial stocks. While not a pure play industrial ETF, PAVE does allocate more than two-thirds of its weight to the industrial sector.
As is the case with some of the other funds highlighted here, PAVE can benefit from politics and the good news on that front is twofold. First, infrastructure spending is one of the rare bipartisan issues. Second, there is no doubt the U.S. faces an array of infrastructure projects that need shoring up and need those improvements immediately.
“Making a real effort to update the U.S. infrastructure would make the most sense now while the economic environment can still support the investment,” reports Forbes. “Acting now would bolster and extend the current economic growth cycle and provide the foundation for decades of growth in the future. Conversely, putting it off until after a recession has begun would push the U.S. back even further. And with the U.S. already decades behind in terms of infrastructure development, waiting simply makes it more difficult.”
First Trust RBA American Industrial Renaissance ETF (AIRR)
Expense ratio: 0.70%.
The First Trust RBA American Industrial Renaissance ETF (NASDAQ:AIRR) is another unique alternative to the traditional industrial ETF. This fund focuses on mid- and small-cap industrial and community bank stocks. AIRR’s bank exposure is capped at 10% of the fund’s overall weight and those bank stocks only come from states with heavy manufacturing exposure.
AIRR’s 53 holdings have a median market value of $1.48 billion, indicating that this is a small-cap industrial ETF. The structure of this industrial ETF makes it sensitive to manufacturing data and fluctuations in the broader small-cap space.
AIRR is up 11% this year, but on a technical basis, the fund may need to rally above $26 to lure in new buyers.
Todd Shriber does not own any of the aforementioned securities.