How Thematic ETFs Differ From Sector Funds | ETF Trends

Industrials securities are unloved by financial advisors. However, it is the backbone of a relatively popular sector ETF and two relatively new thematic ETFs positioned to benefit from transformational changes. Perhaps they want to dive deeper into the fundamentals with us during the VettaFi Equity Symposium on September 21. 

This week, VettaFi hosted a webcast with State Street Global Advisors with advisors. We asked, “Which sector do you find most attractive to invest in for the rest of 2023?” The most popular selections were energy (44%) and information technology (23%). Healthcare (18%) and financials (9.7%) also garnered some support. The least popular of those listed was industrials, with 5.8% of the vote. 

The Industrials Select Sector SPDR (XLI) is the biggest industrials sector ETF, with $15 billion. The ETF has pulled in $1.1 billion of new money in the last six months and was up 7.4% year to date. XLI is market-cap-weighted and owns the stocks within the S&P 500 Index like Boeing, Caterpillar, Deere, General Electric, and Honeywell.  

Thematic ETFs Favoring Industrials 

Two thematic ETFs that launched in 2023 also have most of their assets in the industrials sector, but what’s inside and why is very different than XLI. 

The Engine No.1 Transform Supply Chain ETF (SUPP) began trading in February 2023. It is a concentrated, actively managed thematic ETF. Engine No 1 believes there is a once-in-a-generation shift underway. The fund focuses on businesses transforming and that have “relocalized” their supply chains, plants jobs, and other parts of their operations. 

SUPP recently had 61% of its assets in industrial stocks. While there’s some overlap with XLI, positions like Waste Management (8.0% of SUPP, 1.9% of XLI) and CSX Corporation (6.6%, 2.0%) are favored by Engine No. 1. However, SUPP does not own any of the 10 largest positions in XLI. Instead, the ETF has meaningful stakes in information technology (23%) and materials (13%) through companies like Lam Research, Martin Marietta Materials, and Nvidia. 

Green Infrastructure Impacts Other Sectors 

The Xtrackers US Green Infrastructure Select Equity (UPGR) began trading in July 2023. According to DWS, the signing of the Inflation Reduction Act and the Infrastructure Investment and Jobs Act confirmed the United States’ commitment to revamping its infrastructure in a sustainable way. UPGR seeks to provide exposure to companies that can benefit in the short and long term from this trend. 

Industrials (53% of assets) is the largest sector for the index-based ETF through positions in Array Technologies, Carrier Global, Ingersoll-Rand, Lennon International, and Republic Services. However, UPGR also has meaningful stakes in consumer discretionary (13%), utilities (12%), materials (8.3%), and energy (7.2%) sectors. Altus Power, Fisker, and Rivian Automotive are among the ETF’s top 10 positions. Similar to SUPP, many mega-cap industrials are not found inside. 

VettaFi’s Equity Symposium on September 21 

SUPP and UPGR are newer thematic ETFs that warrant further attention. I’m excited to be joined tomorrow, September 21, during the VettaFi Equity Symposium by Eli Horton of Engine No. 1 and Arne Noack of DWS to talk about thematic ETFs. Join my colleague Tom Lydon and me by registering today before the 11 a.m. ET start time.

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