The 2023 equity market rally has been led in large part by growth sectors — communication services, consumer discretionary, and technology. That, coupled with elevated recession speculation earlier in the year, has been a drag on cyclical sectors, including industrials. However, that scenario is changing for the better with some cyclical sectors recently showing signs of life. Recent bullishness on that front could encourage investors to examine exchange traded funds such as the Invesco S&P 500 Equal Weight Industrials ETF (RSPN).
On a year-to-date basis, RSPN is trailing the S&P 500, but the Invesco ETF is beating its largest cap-weighted counterpart by 440 basis points, as of July 26. Importantly, industrial stocks are getting their respective acts together. For the 90-day period ending July, RSPN is beating not only cap-weighted rivals, but the S&P 500 as well.
“Recently many cyclical parts of the market, including the industrials sector, have outpaced the broader market as well as tech,” according to BlackRock. “This shift in leadership has coincided with a steady stream of better-than-expected economic data. As economic expectations improve, the equity rally has expanded to favor more cyclical companies.”
Industrials ETF Options Are Getting Intriguing
The $553.4 million RSPN follows the S&P 500® Equal Weight Industrials Index and is home to 77 stocks. About 69% of its holdings are “blend” stocks, so the fund isn’t overweight on growth or value names. For value investors, that’s all right because the industrials sector is currently chock full of attractive valuations.
“Valuation is another factor favoring cyclicals. In aggregate, U.S. equities are trading at approximately 19x forward earnings, well above the historical average and a premium to most international markets,” added BlackRock. “However, the premium is being driven by a relatively small number of stocks, mostly in technology and tech-related areas. Outside of these, most sectors, including industries, are trading at or below their long-term average.”
With so many market participants enthralled by secular themes such as artificial intelligence, it’s easy to overlook the growth potential of a sector like industrials. However, RSPN may have more disruptive growth potential than meets the eye because some industrial companies have more long-term structural tailwinds than they’re given credit for.
“A rapidly changing geopolitical landscape, pandemic induced supply concerns and a renewed focus on defense spending are driving generational shifts,” concluded BlackRock. “For example, after decades of building increasingly complicated global supply chains, companies are now focusing on resilience rather than just cost. The net effect is a trend towards onshoring and ‘near-shoring’, i.e., locating manufacturing in adjacent and friendly countries.”
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