Investigating Industrial ETFs for a Year-End Rally

September 23rd at 8:00am by Tom Lydon

Industrial ETFs such as the Industrial Select Sector SPDR (NYSE: XLI) has been solid performers this year, though these funds may not be getting the credit they deserve. Slowing global economic growth and fears about the impact of loss government spending for the sector have been headwinds, XLI, rival funds and their holdings have had to contend with in 2013.

Even with those factors, XLI, the largest industrial sector ETF by assets, has managed a 25.7% year-to-date gain. That is good enough to make XLI the fourth-best of the nine sector SPDR ETFs in 2013, trailing only the health care, consumer discretionary and financial services equivalents. [ETF Spotlight: Industrial Sector]

In evidence that a cyclical rotations of sorts has materialized, XLI has vaulted more conservative sector ETFs, such as consumer staples and utilities funds. Investors poured into non-cyclical stocks as an alternative to the historic low yields in government debt. Still, the housing recovery, the shale boom and the industrial sector’s surprisingly stout performance in face of government sequestration make the ETFs like XLI and the Vanguard Industrial ETF (NYSEArca: VIS) attractive plays for a possible year-end rally in stocks. [Cyclical Shifts Put Industrial ETFs in the Lead]

“Weak global economic growth has been a headwind for manufacturing all year long, but that hasn’t kept the industrials sector down. Indeed, it’s put up a total return of 27% in 2013. Now that Europe has emerged from recession and we’re getting signs of a pick up in Asia, industrials should have some wind at their backs,” notes Dan Burrows for Investor Place.

VIS has an expense ratio of 0.14% per year compared to 0.18% for XLI. The Vanguard offering is up 26.7% this year and both ETFs are home to familiar industrial names like Dow components Boeing (NYSE: BA), General Electric (NYSE: GE) and 3M (NYSE: MMM).

Bolstering the case for industrial ETFs are favorable seasonal trends. Although October is not a great month for stocks and a downright bad month for gold and small-caps, the tenth month of the year has been historically a good time to establish positions in cyclical sectors.

Additionally, should tapering fears reenter the conversation, forcing 10-year Treasury yields higher in the process, industrial ETFs could remain attractive. On a historical basis, only consumer discretionary stocks outpace industrials in rising interest rate environments.

Industrial Select Sector SPDR

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GE.

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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