With the U.S. economy gathering strength, the capital goods
and the industrial manufacturing sector is coming into focus.
This sector is basically a cluster of all the cyclical and
economically sensitive companies, and it functions in accordance
with the overall health of the broader economy.
With an optimistic sentiment prevailing in the industry,
investors are increasingly shifting the spotlight from the
defensive sectors like utilities and consumer staples to cyclical
sectors like industrials.
The industrial sector has recently attracted investor
attention, thanks to improved domestic demand for industrial
equipment and will continue to post decent growth strengthened by
the airline, railroads, and shipping companies as well.
manufacturing activity declined
in May 2013 as per the ISM manufacturing index, for the first
time in six months, hurt by lower new orders and less demand for
exports, we believe the sector still has plenty to offer. With
recovering employment levels and growing consumer confidence,
this sector should deliver modest growth for the rest of the year
Can U.S. Manufacturing Industries Keep
Prior to May, the industrial production was rising at a solid
clip, enhanced by decent levels of manufacturing and mining.
Improvement was also noticed in the capacity utilization rate.
Moreover, of the 18 U.S. manufacturing industries listed, 10
actually reported growth in May.
Although the Fed chairman, Ben Bernanke, recently suggested
that the Fed may
scale down its easy money
policy of $85 billion a month in bond purchases later
this year and to seal the program by mid 2014, we believe, time
to panic over such moves has not come yet as the U.S. industry
gathered considerable strength to ride on its core fundamentals
Winning ETF Strategies For the Second Half
Given this, a look to a broad pick in the competitive space
may be a good idea, as it will spread risk around while still
allowing for the ability to tap into the positive longer-term
trend in the space. While there are a number of industrial
on the market, one way to target the best the sector has to offer
is by looking only at top ranked funds using the Zacks ETF
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook for the underlying industry, sector,
style box or asset class (Read:
Zacks ETF Rank Guide
). Our proprietary methodology also takes into account the risk
preferences of investors. ETFs are ranked on a scale of 1 (Strong
Buy) to 5 (Strong Sell) while they also receive one of the three
risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of the five ranks within
each risk bucket. Thus, the Zacks Rank reflects the expected
return of an ETF relative to other products with a similar level
For investors seeking to apply this methodology to their
portfolio in the Industrial sector, we have taken a closer look
at the top ranked XLI. This ETF has a Zacks ETF Rank of 1 or
Strong Buy and more details about this product are highlighted
Industrial Select Sector SPDR (
Launched in Dec 1998, Industrial Select Sector SPDR (XLI) is a
passively managed exchange traded fund (ETF) designed to track
the performance of the S&P Industrial Select Sector Index,
which is dominated by the stocks of different industries within
This fund is by far the most popular industrial ETF in the
space with more than $5 billion in AUM and an average daily
volume of over 10 million shares. Holding 63 stocks in its
basket, the fund is moderately diversified across large cap
The product puts nearly 50% of its total assets in the top 10
holdings, suggesting that company-specific risk and return is
higher. Among individual holdings,
General Electric Co (
takes the top spot with a share of 12% while
United Technologies Corp.
) is in second with 5.4% share, and
Union Pacific Corp.
) follows shortly with 5.2% share in the fund.
From a sector viewpoint, the ETF has maximum exposure in the
better-positioned Aerospace and Defense sector with around 25.1%
allocation. This is followed by Industrial Conglomerates and
Machinery sectors with around 19.4% and 19.3% allocation,
respectively (see all the
As far as expenses are concerned, XLI is by far one of the
cheapest options on the industrial equities list with a fee of
just 18 basis points a year. This is far below the average
expense ratio of 0.5% in the space, suggesting that it could be
an interesting choice for those seeking to keep total fees
The fund structure is a fine mix of value and growth style
fund and focuses on large cap securities. This large cap focus
makes this fund a low-risk opportunity, especially compared to
others in the space.
As such, we have a 'Low' risk outlook for XLI in the near
term. However, being termed as low risk definitely does not mean
low returns for the ETF.
Weakness in some of the regional Fed reports, and concerns
over global central bank action, have dragged down this ETF
lately from its lofty heights. However, the outlook in many of
the fund's key industries is still quite bright, suggesting it is
still a decent play.
This is particularly true when one considers the current
industries that are in favor in the market. Right now, low
growth, low beta, sectors are out of vogue, allowing investments
in sectors like industrials to lead the way (see more in the
Given this trend, a top Ranked ETF like XLI might be a solid
choice in today's environment. The sector could easily the way
out of this current slump, and XLI's makeup is well-positioned to
take advantage of this once investors calm down about Bernanke
and the Fed's policies.
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GENL ELECTRIC (GE): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
UTD TECHS CORP (UTX): Free Stock Analysis
SPDR-INDU SELS (XLI): ETF Research Reports
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