Mondayâs Empire State Manufacturing Survey from the Federal
Reserve New York Bank showed a third consecutive monthly decline in
manufacturing activity in New York. Despite the contraction,
however, there are reasons to be optimistic about stocks within the
industrial sector.
Reason No. 1? Cash. Corporate cash reserves are at a 55-year
high. While much of this cash was built up as a precaution during
the recession, low interest rates are not providing a good return
on investment. Broad macro concerns aside, there are plenty of
arguments for companies to increase their spending on
equipmentâdirectly benefiting the industrial companies that make
them.
Thatâs especially true given the current tax credit:Companies
that invest in new equipment in 2011 can deduct the full value of
that purchase immediately, instead of deducting costs slowly over
the life of the equipment, as is usually the case. That benefit
declines in 2012 to a 50 percent immediate deduction; after 2012,
deductions are much slower.
Inventories are also very low compared with where they were over
the last decade. Any signs of an economic recovery could lead
manufacturing activity to pick up sharply to fill in any inventory
gaps.
Â
Source:U.S. Commerce Department
Â
If you buy into the bullish argument, how do you play it? There
are currently eight broad market industrials ETFs to choose from.
The first question you should ask when choosing between them is:Do
you want a broad market fund or specific market-cap exposure?
Â
|
1 Month
|
3 Month
|
6 Month
|
1 Year
|
|
VIS
|
-13.32%
|
-15.83%
|
-15.79%
|
11.35%
|
|
IYJ
|
-12.71%
|
-15.38%
|
-14.91%
|
12.98%
|
|
XLI
|
-12.78%
|
-15.00%
|
-14.60%
|
10.54%
|
|
RGI
|
-13.35%
|
-16.16%
|
-15.16%
|
8.90%
|
|
PSCI
|
-14.14%
|
-14.62%
|
-15.09%
|
13.37%
|
|
PRN
|
-13.60%
|
-16.50%
|
-16.00%
|
14.97%
|
|
FXR
|
-14.64%
|
-17.55%
|
-17.59%
|
9.40%
|
|
FIL
|
-12.39%
|
-14.91%
|
N/A
|
N/A
|
Â
For investors wanting broad-based exposure, the Vanguard
Industrials ETF (NYSEArca:VIS) is the best choice. The expense
ratio is only 0.24 percent, well below the 0.47 percent expense
ratio of the iShares Dow Jones U.S. Industrial Sector Fund
(NYSEArca:IYJ). VIS also holds 365 companies compared with only 243
in IYJ.
The lowest expense ratio comes from the Industrial Select SPDR
Fund (NYSEArca:XLI) at 0.20 percent. The fund invests in the
industrial companies in the S&P 500. While the expense ratio is
enticing, it only gives exposure to the largest industrial firms in
the U.S.âcurrently 62 stocks. The fund offers investors access to
what should be the safest industrial firms, and also offers the
highest dividend yield, at 2.19 percent.
One risk is concentration:XLI is market-cap weighted and has
over 10 percent invested in General Electric (
GE
). One alternative is the Rydex S&P 500 Equal Weight Fund
(NYSEArca:RGI). It owns the same large-cap companies as XLI but
invests equal amounts in each stock. Currently GE has just a 1.62
percent weighting in RGI. The downside is its expense ratio, which
at 0.50 percent, is 2.5 times larger than XLI.
Small-cap companies, while riskier, may benefit the most from an
economic recovery. These companies have a harder time finding
funding during recessions, but are able to generate higher growth
rates during economic expansions. For investors looking strictly
for small-cap exposure, there is the PowerShares S&P Small Cap
Fund (NYSEArca:PSCI). The fund charges just 0.29 percent in fees,
and holds 89 small-cap stocks.
Industrial sector stocks offer investors a way to profit if a
double-dip recession never materializes. Any increase in business
confidence should translate directly into increased purchases of
equipment and higher industrial earnings.
Â
Don't forget to check IndexUniverse.com's ETF Data
section.
Copyright ®
2011 IndexUniverse LLC
. All Rights Reserved.