Industrial stocks aren’t performing poorly in 2021. The S&P 500 Industrials Index is up 18%, but that lags the nearly 23% returned by the S&P 500.
Some market observers are wagering that the sector will attain a leadership role in 2022. That could be meaningful for myriad exchange traded funds, including the First Trust Industrials/Producer Durables AlphaDEX® Fund (NYSEARCA:FXR).
The $1.82 billion FXR, which turns 15 years old next May, tracks the StrataQuant® Industrials Index. FXR could be ideally positioned to capitalize on an industrials resurgence because the fund is already a leader in this category, as highlighted by a 20.39% year-to-date gain. Fundstrat’s Tom Lee is among those forecasting better things for the industrial sector in 2022.
“One epicenter group that has underperformed is the industrial sector. However, Lee said in a note to clients that the lag has been caused by industrial companies with more international exposure, suggesting that supply chain issues are holding the group back,” reports Jesse Pound for CNBC.
For FXR, the difference maker is methodology. The fund doesn’t employ market capitalization weighting. Rather, it scores stocks based on “growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Looked at another way, FXR isn’t dominated by traditional industrial fare, such as Boeing (NYSE:BA), Honeywell (HON), and Lockheed Martin (NYSE:LMT). In fact, none of those stocks are among FXR’s top 10 holdings, and no stock dominates the fund because the largest weight assigned to any of the 132 holdings is just 1.48%. The median market value of FXR components is just $12.34 billion — comparatively low relative to competing cap-weighted funds.
Fundstrat’s Lee sees industrials as beneficiaries of a stronger U.S. dollar, and that’s something to consider with the Federal Reserve considering a 2022 rate hike, which could further prop up the dollar.
“The recent strengthening of the U.S. dollar is another reason for industrial stocks underperforming, according to Fundstrat,” notes CNBC. “Industrial companies are beating sales forecasts at a lower rate than S&P 500 companies in general, but the group is projected to have the second-highest revenue growth in 2022, Lee said.”
Transportation stocks represent 20% of FXR’s roster while support/services and construction/materials names combine for over 34%.
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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.