Industrial ETFs Benefit as Cyclical Sectors Surge

The Industrial Select Sector SPDR (NYSEArca: XLI), the largest exchange traded fund tracking industrial stocks, is benefiting as cyclical sectors surge this year. XLI is higher by about 10% year-to-date and, along with rival industrial ETFs, is getting a lift from high-flying aerospace and defense stocks.

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 some marquee members of XLI’s lineup recently reported solid second-quarter earnings, the stocks tumbled.

“Last week companies like United Technologies (UTX), Lennox International (LII), and 3M (MMM) reported better-than-expected earnings and solid guidance, only to see their shares tumble. Indeed, through Wednesday, industrials that delivered that holy grail of earnings season—the beat and raise—had dropped 1% on average, according to Baird. And while that’s better than the 6% tumble for stocks that missed expectations or lowered guidance, it still seems a mite unfair,” reports Ben Levisohn for Barron’s.

Aerospace and defense names remain a source of strength for diversified industrial ETFs, such as the aforementioned names. For example, the iShares U.S. Aerospace & Defense ETF (NYSEArca: ITA) and the PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) hit all-time highs last Friday.

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.