Industrial ETFs Outperforming in Early 2012

January 16th at 6:00am by Tom Lydon

When constructing a well-diversified portfolio, exchange traded fund investors should consider including various sectors to enhance their market exposure. For instance, the industrial sector may provide individuals with exposure to strong earnings growth, according to S&P analysts.

ETFs tracking the industrial sector led the market lower during the summer sell-off. However, industrial ETFs have outperformed the overall S&P 500 since the market bottom in October.

Industrial and materials stocks are two former laggards that have seen big turnarounds this year, says Bespoke Investment Group. “Both of these sectors came under pressure last year because of their heavy international exposure and slower global economic growth, but so far this year investors are looking at the greener side of the grass,” the firm points out.

S&P Capital IQ’s Equity Strategy Group raised its recommendation on the industrials sector to “overweight” due to macroeconomic factors and strong earnings growth potential, according to a research note.

According to Alec Young, Global Equity Strategist at S&P, the sector may outperform as investors discount the recovery in the U.S., along with strong growth from Asia, while the Eurozone contains its financial problems. Young also projects industrials will gain 13% over 2012, compared to the S&P 500′s 8.1% estimate.

Jim Corridore, industrials and logistics equity analyst at S&P, says heavy industrial machinery, equipment rental, truck and truck engine manufacturing and package delivery will all benefit from higher global demand this year.

S&P Capital IQ ranks the sector as overweight on performance, risk and cost considerations, including bid/ask spread, expense ratio, standard deviation and technical analysis, among others.

S&P also raised its ranking on industrials sector ETFs, including:

  • Industrial Select Sector SPDR Fund (NYSEArca: XLI). Top component holdings General Electric (NYSE: GE), United Parcel Services (NYSE: UPS), United Technologies (NYSE: UTX) and Caterpillar (NYSE: CAT). The ETF has a 0.20% expense ratio.
  • iShares Dow Jones U.S. Industrial Sector Index Fund (NYSEArca: IYJ). The fund’s top holdings also include GE, UTX, CAT, UPS and 3M Co. (NYSE MMM). IYJ has an expense ratio of 0.47%.
  • Vanguard Industrials Index Fund (NYSEArca: VIS). Top holdings include GE, UTX, CAT, MMM and UPS. VIS has an expense ratio of 0.19%.

The three are weighted toward the aerospace and defense, machinery and industrial conglomerates sub-sectors.

“These ETFs offer strong, diversified exposure to the industrials sector, which S&P Capital IQ is recommending,” Todd Rosenbluth, S&P Capital IQ ETF analyst, said in the note.

Industrial Select Sector SPDR Fund

For more information on the market sectors, visit our sector ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.