ETF Trends
ETF Trends

The Industrial Select Sector SPDR (NYSEArca: XLI) surged 20% last year, underscoring the strength of cyclical sectors, but that does not mean XLI and rival industrial exchange traded funds are limited heading into 2017. The opposite may be true.

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).

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.

Increased infrastructure spending is also seen as a catalyst for industrial stocks and ETFs.

“If investors don’t have a dream to latch on to, stable-growth and income-generating industries usually outperform. Today, the dream is very much tied to fiscal stimulus. Investors are increasingly relying on governments in Japan, the US and elsewhere to spend more aggressively,” according to ETF Daily News.

The American Society of Civil Engineers calculated that the U.S. will fall $1.44 trillion short of the $3.32 trillion required to inves tin infrastructure through 2025.

According to Trump’s book, “Crippled America: How to Make America Great Again,” he has called for a “trillion-dollar rebuilding program” that will be “one of the biggest projects this country has ever undertaken.”

While the federal government goes through the political throes, states and cities seem to be ahead of the curve, spending billions of on infrastructure projects. The recent spending is still only a drop to what is needed, but municipal officials who have hesitated to borrow are beginning to loosen their purse strings.

“Of course, it will take several quarters to draw up a comprehensive infrastructure spending plan—and even longer to implement it. But if spending of this nature becomes a reality, it can provide a long-term source of demand that will be critical to lifting valuations in industrials and other cyclical sectors,” adds ETF Daily News.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.