The sell-off in the oil markets has weighed on capital spending from the energy sector as producers hold off on new projects, pressuring U.S. industrial companies and sector-related exchange traded funds.
Over the past year, the Industrial Select Sector SPDR (NYSEArca: XLI) declined 10.8%, Vanguard Industrials ETF (NYSEArca: VIS) dropped 9.2%, iShares U.S. Industrials ETF (NYSEArca: IYJ) fell 9.2% and Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU) decreased 10.3%.
The industrial sector has dipped almost 8% year-to-date, making them the third worst performing S&P 500 group of the year, reports Nicole Bullock for the Financial Times.
“[Industrials] are the transmission mechanism between the energy sector and the rest of the economy,” Nicholas Colas, chief market strategist at Convergex, told the Financial Times.
According to S&P Dow Jones Indices, capital expenditures at energy companies declined 30% in the third quarter as oil prices continued to drop off.
General Electric (NYSE: GE) recently warned of increased pressure from falling crude oil prices, which weighed on the company’s division serving oil and gas industries.
“What is evolving over time is our understanding of how much energy exposure industrial companies have,” Peter Stournaras, a portfolio manager at BlackRock, told the Financial Times. “People were originally looking at revenues directly at oil companies and now [are]looking at tangential exposure because oil capex is going down. For example, it is not an oil company but it might make a product that is supplied to an oil company.”
Moreover, the industrial space is being weighed down by a slowing global outlook and a strengthening U.S. dollar. The industrial space includes a large global exposure and the weakening overseas economies, notably in the emerging countries, are could weigh on demand. Furthermore, a strengthening U.S. dollar makes these exports more expensive to foreign buyers.
ETF traders who want to hedge against further weakness in the industrial space can also look to the ProShares UltraShort Industrials (NYSEArca: SIJ), which tracks the inverse 2x or -200% daily performance of the Dow Jones U.S. Industrials Index. SIJ has increased 16.6% year-to-date.
Industrial Select Sector SPDR
Max Chen contributed to this article.