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.
“Boeing (BA) posted its biggest one-day gain since 2008 when it surged nearly 10% last Wednesday after beating earnings expectations by 25 cents and raising its full-year guidance to a range of $9.80 to $10 a share. Caterpillar, too, surged when it reported similar results. That’s a sign that parts of the industrial complex are still strong,” according to Barron’s.
Related: ETF Performance Report: July 2017
Boeing and Caterpillar, both members of the Dow Jones Industrial Average, are both top 10 holdings in XLI and combine for nearly 9.5% of the ETF’s weight.
In addition to political rhetoric, 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.
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