It may seem hard to believe following the carnage seen on Friday, Aug 23, but the S&P 500 is still higher by 1.2% over the past 90 days. Perhaps what is not surprising is that with stocks being smacked around on the back of trade tensions, tariff-sensitive sectors are suffering. This is true for some industrial ETFs as well.
While not as export-dependent as the energy or technology sectors, industrials aren’t as export-defensive as, say, healthcare, real estate or utilities. As such, the Industrial Select Sector SPDR (NYSEARCA:XLI), the largest industrial ETF, is lower by a market-lagging half a percent.
To be fair, there are some bright spots among industrial ETFs, thanks in large part to a recent rebound by Dow component Boeing (NYSE:BA), meaning some aerospace and defense have been holding up. Conversely, some other industrial ETFs are languishing.
Here, we’ll look at some of the industrial ETFs investors would be best served by leaving alone for the time being.
Invesco S&P SmallCap Industrials ETF (PSCI)
Expense ratio: 0.29%
When small-cap stocks are part of the problem (and they currently are), not part of the solution, investors ought to steer clear of the related sector funds, including the Invesco S&P SmallCap Industrials ETF (NASDAQ:PSCI).
Perhaps the best thing that can be said of this industrial ETF is that over the past 90 days, the fund has performed less poorly than the S&P SmallCap 600 Index. Then again, PSCI has been nearly three times as bad as the large-cap XLI over the same period.
Two other marks again PSCI in the current climate. First, the fund devotes nearly 39% of its weight to growth stocks, a corner of the market under pressure due to trade tensions. Second, this industrial ETF’s weight of just around 13% to aerospace and defense stocks is not large enough to offset weakness in its other industry exposures.
iShares Transportation Average ETF (IYT)
Expense ratio: 0.43%
Opportunities may still exist with transportation funds, but the iShares Transportation Average ETF (CBOE:IYT) is one of the more economically sensitive industrial ETFs out there and that’s saying something. In a vacuum, IYT’s 3.6% three-month slide is concerning, but it’s even more concerning in the broader context of transportation stocks being viewed as accurate tells of broader market direction.
Residing more than 16% below its 52-week high, this industrial ETF face near-term technical challenges because it also labors below its 50- and 200-day moving averages. IYT fits the bill as an industrial ETF to watch, but not one to buy right now.
“Just as some equity analysts were providing commentary about potentially becoming more constructive on the transportation stocks, the next shoe dropped,” according to Freight Waves. “While investors were purportedly sniffing around the space looking for bargains, likely not interested in a full basket approach to owning the transports, a new round of Chinese tariffs were announced, taking the breath out of the transports.”
First Trust RBA American Industrial Renaissance ETF (AIRR)
Expense ratio: 0.70%
The First Trust RBA American Industrial Renaissance ETF (NASDAQ:AIRR) would be one of those industrial ETFs that when the sector is working, it could really deliver for investors. However, that is not the current state of affairs for the sector and last Friday’s price action suggests AIRR’s 8.41% month-to-date loss could easily increase.
AIRR isn’t a pure industrial ETF; it allocates about 10% of its weight to financial services stocks, but if industrial exposure is going to be augmented right, best not to do it with another scuffling sector. Compounding that issue is that AIRR’s bank holdings are located in states that are major manufacturing centers, a trait that is only valuable if the U.S. can continue avoiding a recession.
Hopefully, that will be the case, but this industrial ETF has another reason to avoid it: the median market value of its 56 holdings is around $1.5 billion, meaning it’s a small-cap fund at a time when smaller stocks are languishing.
John Hancock Multifactor Industrials ETF (JHMI)
Expense ratio: 0.40%
The John Hancock Multifactor Industrials ETF (NYSEARCA:JHMI) is another example of an industrial ETF that would certainly be worth embracing if sentiment surrounding the sector wasn’t as dour as it is now. Technically speaking, there are concerns here, chief among that a drop of the 200-day line that JHMI is clinging to could lead to rapid share price erosion.
JHMI is advertised as a multi-factor fund, but the factors it emphasizes — value, size and profitability — are not used in its security selection process. JHMI and other Hancock’s other sector ETFs track indexes developed by Dimensional Fund Advisors.
“Dimensional’s approach to sector indexing directly targets factors associated with higher expected returns, provide broad diversification to increase the reliability of capturing sector beta relative to strategies that are concentrated or ignore market prices, and aim to limit turnover to trades that meaningfully affect expected returns,” according to ETF Trends.
In fairness to this industrial ETF, it has been performing less poorly this month traditional industrial ETFs, indicating that if risk appetite is renewed and cyclical stocks rally, this fund is poised for some upside.
iShares Global Industrials ETF (EXI)
Expense ratio: 0.46%
As its name implies, the iShares Global Industrials ETF (NYSEARCA:EXI) is a global ETF, meaning investors should expect hefty exposure to domestic equities with sprinkles of industrial stocks from other large developed markets. That would be an alluring combination if the world’s two largest economies weren’t mired in a trade war and some other big economies weren’t flirting with recessions.
However, those are conditions investors are contending with right now and as a result, EXI is trailing the MSCI All-Country World Index by 100 basis points this month. EXI allocates over 68% of its combined weight to the U.S. and Japan, but a significant portion of the remaining portfolio is allocated to Europe, a region where several major economies are weakening. Oh yeah, President Trump could easily target Europe with trade tariffs, too.
Even if cyclical stocks can get their mojo back, the moving geographical parts of EXI may say that investors looking to wade back into industrials would be better served doing so with a domestic focus. EXI only trades at a slight discount to the MSCI ACWI Index, which could be too much optimism given the recent lethargy in the industrial sector.
Todd Shriber does not own any of the aforementioned securities.