Industrial ETFs: Trouble Ahead?

The Industrial Select Sector SPDR (NYSEArca: XLI), the largest exchange traded fund tracking industrial stocks, and rival industrial ETFs are lagging broader equity indexes in significant fashion. For example, XLI entered Wednesday with a year-to-date loss of 4.6% while the S&P 500 was lower by just 0.3%.

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. In early April, shares of Dow component Boeing slipped after China announced a 25% tariff on airplanes in response to proposed tariffs by President Donald Trump’s administration on $50 billion worth of imports, including medicines, chemicals and consumer electronics.

Additionally, some technical analysts are concerned the sector be on the cusp of a significant bearish reversal.

Ominous Forecasts for Industrials

Fundstrat technical analyst Rob Sluymer “writes that the XLI is reversing the relative performance uptrend that began in early 2016—and the trend is not limited to the big players, as the equal-weighed PowerShares S&P 500 Equal Weight Industrials Portfolio (RGI) also reversing its uptrend (relative to the S&P 500) in the past two years,” reports Teresa Rivas for Barron’s.

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. However, the sector’s recent performance indicates industrials are disappointing at a time when the sector should be thriving.

“These breaking trends, led by industrials, along with a bottoming U.S. dollar, are ‘further indications that the four-year cycle that began in early 2016 is showing evidence of maturing.’ Sluymer writes that while the S&P 500 appears to hold its support at 2016-2018 uptrend levels and 200-day moving average, leadership is shifting, with cyclical, dollar-sensitive groups incrementally weakening, as domestic groups improve,” according to Barron’s/

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).

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.