The industrial sector, the fifth-largest sector weight in the S&P 500, is again showing it is a prime beneficiary of a resurgent U.S. economy.
Not only has the sector delivered market-beating capital appreciation this year, but several of the group’s most recognizable names and the stocks that dominate industrial exchange traded funds, have recently been boosting shareholder rewards.
Since the start of December, former Dow component Honeywell (NYSE: HON) announced a $5 billion buyback plan while current Dow members General Electric (NYSE: GE) and Boeing (NYSE: BA) unveiled dividend increases. On Dec. 17, 3M (NYSE: MMM) boosted its dividend by a third while adding it could buy back up to $22 billion of shares through 2017.
Those stocks are top-seven holdings in the Vanguard Industrials ETF (NYSEArca: VIS), combining for 22.7% of the ETF’s weight at the end of November, according to Vanguard data.
“For investors interested in a diversified basket of U.S. industrials-sector companies, we recommend VIS,” said Morningstar analyst Robert Goldsborough in a note.
“Many of VIS’ holdings have significant sales outside of the U.S., giving this fund some exposure to global growth trends. At the same time, the U.S. industrials sector is exposed to a meaningful amount of cyclicality. That cyclicality, coupled with a narrow sector focus, make this fund more volatile than other, broader ETFs. Over the past five years, this fund’s volatility of return has been 22.0% compared with 15.8% for the S&P 500. This above-average volatility is partly attributable to the industrial sector’s cyclicality,” added Goldsborough.
While the industrial is certainly cyclical and can be viewed as somewhat high beta, that cyclicality is not such a bad thing when markets favor such fare. For example, the mid-fourth quarter marks the start of favorable trends for industrial stocks and ETFs. VIS has more than complied, gaining 12.2% since Oct. 15 compared to an 8.9% gain for the S&P 500. [Industrial ETFs: November Strong]
Industrial ETFs have also been boosted this year by a surprisingly strong performance out of the aerospace and defense sub-sector, something few investors predicted at the start of the year given that group’s vulnerability to government spending cuts. [Stealthy Aerospace ETF Soars]
“VIS invests 22% of its assets in aerospace and defense companies. Defense contractors in particular are more sensitive to government spending than the overall business cycle, and given ongoing sequestration, we expect defense spending to slow in coming years,” said Goldsborough.
VIS is not without competition, new or old. With annual fees of 0.14%, the ETF was once the least expensive among industrial funds, but the new Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU) charges just 0.12% per year. [Fidelity’s New ETFs Put Vanguard on Alert]
While critics would be apt to say FIDU is too new or too small to merit consideration or that its perceived lack of liquidity implies added risk, those assessments are simply inaccurate. Regarding the liquidity issue, there is no reason FIDU with a top-10 lineup that is nearly a mirror image of VIS’, would lack for liquidity.
Vanguard Industrials ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GE.