The industrial revolution

If you subscribe to business cycle theory, your outlook appears something like this…

That might explain the recent interest in industrial ETFs amongst our institutional advisor searches.

The question is are we in the middle or late period of a bull market?

That’s tough to say given the speed at which we ricocheted off the bottom. 

Economically speaking, we’re still in recovery mode.

According to the stock market, we’re closer to the top.

This divergence is a big reason many academics aren’t adhering as strictly to this model.

Data shows a massive demand and lack of supply against industrial equipment – everything from airplanes to air conditioners.

Yet, markets, propped up by easy money, appear to be topping out.

One could argue that without the Fed, stocks would better align to the traditional model.

Yet, here we are, in this new-new normal, or whatever iteration we decide to call it.

It’s difficult to predict how markets will react, only that we can say that industrial stocks are likely to outperform other sectors like technology in the near-term.

With that in mind, we wanted to cover three of the most popular ETFs popping up in our TrackstarIQ data.

Industrial Select Sector SPDR Fund XLI

The most popular industrial ETF with over 11 million shares traded each day, the XLI lands in the SPDR family of sector funds.

It includes the biggest and the baddest U.S. industrial stocks covering everything from machinery to homebuilding.

Like many other sector-specific ETFs, the top 10 stocks make up ~40% of their holdings.

Since most manufacturing companies are fairly large, the average market cap for each holding is around $78 billion.

The ETF retains a low expense ratio near 0.12% with a dividend yield of 1.23% and a year-to-date return of a bit more than 17%.

iShares U.S. Industrials ETF IYJ

Another popular ETF brand, iShares U.S. industrials adds a slightly different twist to the makeup.

Where the XLI had software and IT services at only 2.92% of its holdings, IYJ expanded that to almost 15% with top holdings including Paypal (PYPL) and Accenture (ACN).

It has about 10% the assets under management of the XLI, but over twice the holdings at 196. Additionally, it runs a bit hotter with a 0.42% expense ratio along with a 1.0% annual dividend yield.

Volume is much lower at only around 90,000 shares, so keep that in mind.

iShares U.S. Aerospace & Defense ETF ITA

In the first two ETFs, we looked at broad-based industrials.

The ITA focuses on a specific subset that tends to operate a bit differently than other parts of the industrial sector.

Generally speaking, defense tends to be more insulated from economic turbulence than basic industrials. They work with government contracts that extend over multiple years.

And outside of the pandemic, aerospace is fairly stable as well.

The expense ratio runs higher at 0.42% with a 1.01% dividend yield.

What’s important to note, as you can see with the top holdings, is the portfolio is concentrated amongst a smaller set of 36 businesses.

Our hot take

We want to point out two additional items.

First, given the size of these companies, if you have holdings in the Dow Jones Industrial Average, double-check for overlap with this ETF.

Second, supply constraints can prevent these companies from reaching their full potential. Don’t assume just because demand is high that drives profits in these manufacturers.

Questions from your clients

  1. Are there any industrial ETFs that include international companies?
  2. What would rising interest rates mean for industrials?
  3. How does this differ from the DJIA?
  4. Are there any industrial ETFs that don’t include defense?

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