In 1613 Sir Thomas Overbury wrote "All the carnal beauty of my
wife, is but skin deep."
The popular phrase implies what we see on the surface is usually
just a small part of the whole. The saying warns us that
beauty will eventually fade through time, but some traits, such as
personality, experiences, and intellect, last a lifetime.
This beauty is as true with ETFs as it is with people.
An ETF on the surface may look great, but once the traits of
the fund such as the holdings, weightings, and risks are
known, it may not be near as pretty as a surface glance
suggests. For the Industrials Select Sector SPDR ETF
(NYSEARCA:XLI), this is especially true. One glance beyond the
surface reveals a some ugly realities.
Some Quick Facts:
The Dow Jones Industrial Average recently made new all time
highs. However this has been old news for the more "pure
play" Industrial sector ETF, ticker XLI. For XLI, that
new high occurred in late December as it surpassed its 2007 $37.43
price high and continues to make new highs today.
The Industrial sector has led the broader S&P 500 since the
November 2012 lows, up 21% versus an S&P's gain of 18% as it
makes up over 10% of the S&P 500 by market
Industrial Sector Weightings
Most investors are aware of the immense size of Apple
(NASDAQGS:AAPL) in the Technology sector (NYSEARCA:XLK). But
many are not aware that the Industrial Sector has a very similar
makeup, making it the second most concentrated of the Sector ETFs
The S&P 500's Industrial sector as of 5/31/13 was made up of
61 companies and weighted based on market cap. The top 10
Industrial companies out of the 61 make up a full 49% of the XLI's
Furthermore, 5 stocks constitute 31% and just 3 stocks make up
over 22% of the XLI's value. But that isn't what makes the
XLI dangerous. The top company in this sector takes the next
3 companies added together just to surpass its weight in the
Index...and that creates concentrated risk. What is this
)? Nope, it only has a 3.9% weighting in the index.
)? The World's largest airplane producer is weighted only at
United Technologies (
) is the second largest Industrial but accounts for only 5.4% of
the Index's movement.
The spreadsheet below captures the breakdown of the Industrial
sector by market cap weighting of the top 10 companies in the
index. General Electric (
) accounts for 12% of the index's movements, and is the proverbial
gorilla in the room.
Beauty is Indeed only Skin Deep
The chart below shows the top five index constituents that make up
31% of XLI's weight and displays the difference in performance
among these five Industrial companies. Since the November
lows, only one of the top companies in the sector, Boeing, has
significantly outpaced the other Industrial companies. The
next three largest companies have also outperformed, up around 25%
since their November lows. If all these companies are
up over 25%, why is the index still stuck at only 15% returns?
Primarily because of GE which is shown by the green line with
only a 12% return.
With such a large concentration of weight in just one company,
investors and traders likely should focus their attention on
General Electric to forecast this index's movement. Although
four of the largest companies in the index are significantly
outperforming the index as a whole, the gorilla in the room, GE, is
dragging the index down.
Apple and Tech were in a Similar Situation
We were able to do a similar analysis on the tech sector, and
Apple's dominance in it, to help suggest selling Apple on 3/24 just
before it tanked from $460 to $390.
Can Apple Regain its Mojo
" written on 4/1/13, I talked about Apple's dominance in the
tech sector and the technical warning signs it was presenting
then. (Also see our recent video, "
Is Apple's Decline Almost Over?
As such a huge component of the index, Apple's role in the
Tech sector for better or worse is similar to GE's in the
What GE is Telling Us
GE has been and remains in an uptrend since the 2009 lows, but
caution is warranted as price has again reached a recognized
technical resistance level at $24 and shown in the next chart
At the bottom of the chart, the relative strength analysis
between GE and the Sector ETF, XLI, shows that since the 2009 lows,
the two have barely outperformed or underperformed each other and
proves that GE will likely tell you most of what you need to know
concerning the Industrial ETF's price movements. Where GE
goes, the ETF follows.
The bottom section of the chart also shows that in early 2008,
GE started showing relative weakness as it underperformed
XLI. Thatwas a clue that GE was leading the index
lower. If a similar relative weakness starts to occur, it
would likely again bea sign that GE's non-industrial exposure is
leading the index into trouble.
Finally, a break of the short-term uptrend in price (shown in red)
would be the first clue that a change in trend is likely
occurring. If that coincides with a relative strength
breakdown, it would only add to the evidence that GE will be
leading the XLI down again. Until that occurs the trend
remains up, but caution is warranted at these price levels.
Profit Strategy Newsletter
uses relative strength analysis along with common sense technical
and fundamental analysis to provide a short, mid, and long-term
forecast along with actionable buy/sell recommendations.
This helps us identify key trend changes in the sectors as
well as the broader markets such as Treasuries,Currencies, and