Siding With Cyclical ETFs Such as Industrials and Technology | ETF Trends

Cyclical sectors historically perform well in the fourth quarter and that could be especially true this year as the Federal Reserve could possibly raise interest rates, a move that could benefit cyclical groups such as industrials and technology.

Data suggest investors have recently been allocating to cyclical ETFs, including the Industrial Select Sector SPDR (NYSEArca: XLI) and the Technology Select Sector SPDR (NYSEArca: XLK).

Although the aerospace and defense industry is perceived as being beholden to Uncle Sam’s whims, the allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth.

Related: Government Programs Send Aerospace ETFs Flying

In addition to political rhetoric, potential catalysts for aerospace ETFs include include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.

Rivals to XLI include the Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU), iShares U.S. Industrials ETF (NYSEArca: IYJ) and the Vanguard Industrials ETF (NYSEArca: VIS).

“Rate speculation seemed to be reflected in sector flows for the month of October. The strongest ETP inflows relative to current AUM were in Financials, Industrials, and Technology. These sectors tend to perform well during rate increases based on historical returns. In contrast, there were outflows in REITs, Consumer Staples, and Utilities, which are traditionally more adversely affected by rising rates,” according to a Credit Suisse note posted by Johanna Bennett of Barron’s.