ETF Spotlight: Industrial Sector

October 12th at 2:30pm by Tom Lydon

The industrial sector has declined in response to several dull manufacturing reports last month and dim prospects for emerging markets growth. The Industrial Select Sector SPDR Fund (NYSEArca: XLI) is a proxy for the U.S. industrial sector and despite the slowdown, S&P Capital IQ ranks it overweight.

“We think that a recovery in existing home markets is especially beneficial to demand for the Building Products group because renovation and remodeling projects on purchased homes typically take place within 18 months of the purchase. On top of that, we believe that a likely rebound in home improvement spending would probably be the best possible factor to assist building products markets, as repair and remodeling projects have been known to account for about 70% of U.S. expenditures in residential construction,” S&P Capital wrote in a recent note. [ETF Chart of the Day: Industrial Sector]

Trends for upward momentum in the housing and construction sector are positive and despite the low levels, they are moving in the right direction. Through August of 2012, the industry recorded 14 consecutive months of year-to-year sales gains of existing homes.

The industrial sector is looking attractive from a valuation standpoint, reports Robert Goldsborough for Morningstar. Over the past quarter, large-cap stocks have performed best, but there are some headwinds for some of the U.S. mega-caps. The future of U.S. defense spending is up in the air until after the presidential election, and overseas demand for industrial materials is uncertain. Companies such as General Electric (NYSE: GE), United Technologies (NYSE: UTX) and Caterpillar (NYSE: CAT) are included in XLI, and are effected by the aforementioned factors. [Industrial ETFs Outperforming in Early 2012]

XLI tracks the Industrial Select Sector Index which consists of aerospace, industrial, rail, airfreight, and construction and engineering. This is one of the largest and most liquid industrial ETFs with $3.3 billion in assets under management. [ETF Buying Patterns Highlight Safety Trade]

Investors can use the industrial sector, or XLI, to provide some insight into the general health of the U.S. economy. While XLI can be a cyclical play, it’s performance to the broad market is not predicable.The industrial sector is providing some slow but solid growth and leading indicators, such as homebuilders, remain positive for now.

Industrial Select Sector SPDR Fund

 

Tisha Guerrero 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.

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