It has been a rough year for industrial sector exchange traded funds. The Industrial Select Sector SPDR (NYSEArca: XLI) is off 5.5% year-to-date. Among the nine sector SPDRs, only the Utilities Select Sector SPDR (NYSEArca: XLU) and the Energy Select Sector SPDR (NYSEArca: XLE) have been worse.
A month ago, only the Consumer Staples Select Sector SPDR (NYSEArca: XLP) was more heavily shorted among the nine sector SPDRs than XLI. A strong U.S. dollar and declining energy sector capital spending are among the issue plaguing industrial ETFs this year. U.S. manufacturing, which makes up 12% of the economy, could remain weak on the lingering effects of the dollar and fuel costs. [Industrial ETFs Could Also Slip On Oil]
XLI has also been stymied by severe declines by the Dow Jones Industrial Average and railroad operators. Over the past month, the Dow is down 1.4%, which does not sound like much, but it is enough to weigh on XLI. The ETF allocates 28.1% of its combined weight to General Electric (NYSE: GE), 3M (NYSE: MMM), Boeing (NYSE: BA), United Technologies (NYSE: UTX) and Caterpillar (NYSE: CAT). Those stocks combine for 19.4% of the Dow. [Dollar’s Loss May Be Large-Cap ETFs’ Gain]
Airlines and railroads, a combined 14.3% of XLI’s weight, have also been problematic for the ETF. Over the past 90 days, none of XLI’s marquee railroad holdings have traded higher. Three of those four stocks have posted double-digit losses and the best of the group has been CSX (NYSE: CSX) with a 90-day loss of nearly 6%.
Obviously, these are not encouraging facts, but some analysts see opportunity with the moribund industrial sector.
“The shale oil & gas revolution is contributing to a manufacturing renaissance that has resulted in steadily rising margins and thus faster EPS growth. However, revenue growth will be hard to come by this year due to the strong USD, and the soft economy is evident in the recent negative revisions. However, the sector’s P/E multiple has held steady over the last year or so even as the market’s P/E has risen, boosting Industrials’ attractiveness to about average,” said AltaVista Research in a recent note.
XLI’s estimated 2015 price-to-earnings ratio of 16.2 is below the 17.6 P/E for the S&P 500, according to AltaVista data. By that metric, only XLU and the Financial Select Sector SPDR (NYSEArca: XLF) trade at deeper discounts to the S&P 500 of the nine SPDRs.
AltaVista has a neutral rating on XLI, a rating that implies the fund’s valuations adequately the fundamentals of the underlying components. The neutral rating also implies average appreciation potential.
Industrial Select Sector SPDR
