The industrial sector and the corresponding exchange traded funds endured a slack earnings report recently from Dow component General Electric Co. (NYSE: GE) to steadily climb higher. In fact, many of the marquee industrial ETFs reside at or near new highs.
That includes the iShares U.S. Industrials ETF (NYSEArca: IYJ), which is up 3.5% year-to-date and more than 34% over the past year.
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.
Hence why industrial ETFs are seen as prime beneficiaries of Donald Trump occupying the White House. On the campaign trail, Trump pledged to spend $1 trillion to shore up America’s roads, bridges, railways and other infrastructure.
“A new President often generates talk of infrastructure spending, and this administration is no different. First, Congress already has large budgets set for the coming year. President Obama signed a five-year $305 billion highway bill in late 2015, which will bump spending by $61 billion this year, and 28 states also are plowing increasing money into infrastructure. The U.S. Bureau of Economic Analysis shows a total spend of more than $160 billion per year on highways,” according to InvestorPlace.
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.
Even diversified industrial ETFs such as IYJ have significant aerospace exposure. For example, three of IYJ’s top 10 holdings are dedicated aerospace and defense companies while several other industrial conglomerates have large exposure to the aerospace and defense industries.
“Aerospace and defense do fall into this IYJ ETF category. Despite the president’s buzz over killing the F-35 jet, there’s no doubt that he is hawkish and will defend American interests … and that may mean killing the sequester. Thus, if defense spending increases, materials as a sector should benefit,” adds InvestorPlace.
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