Year-to-date, the Industrial Select Sector SPDR (NYSEArca: XLI) is the third-worst performer among the nine select sector SPDRs. Only the Utilities Select Sector SPDR (NYSEArca: XLU) and the Energy Select Sector SPDR (NYSEArca: XLE) have been worse.
XLI has been stymied on multiple fronts. In no particular order, tumbling oil prices have pinched demand for oil services provided by some large- and mega-cap industrial names, such as Dow component General Electric (NYSE: GE), also XLI’s largest holding.
On a related note, slack commodities demand has been a drain railroad operators, an industry group that accounts for nearly 10% of XLI’s weight. And in a perversion of historical trends, airline stocks have not been responsive to oil’s slump and that industry is 5% of XLI’s weight. The good news is that airlines have popped over the past month, but XLI is going to need more help. [Airline ETF Ready to Soar]
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]
In a recent research note, AltaVista Research placed a neutral rating on XLI, implying average appreciation potential for the largest industrial ETF. That rating is not by any means damning. As AltaVista notes, that is the rating the research firm assigns to most of the ETFs it tracks. Still, XLI needs some help from its marquee constituents if the ETF is to reverse course and finish 2015 in the green.
Of the 12 Dow stocks that are down year-to-date, three are XLI holdings. That trio is comprised of Caterpillar (NYSE: CAT), 3M (NYSE: MMM) and United Technologies (NYSE: UTX). Those stocks combine for 12.3% of XLI’s weight. So precipitous has been Caterpillar’s slide that it is no longer a top 10 holding in XLI.
“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 the note.
Industrial Select Sector SPDR
