Hampered by the US/China trade flap, the Industrial Select Sector SPDR (NYSEArca: XLI), the largest industrial exchange traded fund, is lower by almost 2.50% over the past week. However, XLI is still up more than 18% year-to-date and some analysts believe the cyclical industrial sector can push higher as 2019 moves along.
In 2019, momentum in cyclical sectors quickly recovered from both a performance and flows perspective as investors looked to areas like communication services, technology and financials over recent weeks. On a valuation standpoint, other areas like materials, industrials and energy appear attractive relative to the S&P 500.
“We would use this market pullback to increase exposure to industrials to overweight. We think it’s one of the more attractive sectors as it stands. There’s three reasons for it,” Oppenheimer head of technical analysis Ari Wald said in a recent CNBC interview.
XLI “seeks to provide precise exposure to companies in the following industries: aerospace and defense; industrial conglomerates; marine; transportation infrastructure; machinery; road and rail; air freight and logistics; commercial services and supplies; professional services; electrical equipment; construction and engineering; trading companies and distributors; airlines; and building products,” according to State Street.
Trade Concerns
Some big-name industrial stocks have been slammed on fears of an escalating trade war between the U.S. and China, the world’s two largest economies. The ongoing uncertainty over the Trump administration’s trade policy threatens to slow corporate spending and drive up costs, which could weigh heavily on the industrial sector.
However, a Chinese trade delegation arrives in the U.S. this week and President Trump is expected to revisit trade issues with China at next month’s G20 summit. Historical data bode well for the industrial sector following a period in which the sector lagged the broader market.
“The sector has tended to mean revert over longer periods. We did a study in our recent report showing that following periods of underperformance over the prior year, which is the case for industrials right now, they’ve underperformed the last 12 months, they’ve tended to post above average returns over the coming year, over the next 12 months,” Oppenheimer’s Wald said in the CNBC interview.
Since the start of the second quarter, investors have pulled $192.28 million from XLI.
For more information on the industrial sector, visit our industrial category.