With the implementation of the third round of quantitative
easing (QE3) and the extension of operation twist aimed at
keeping long term borrowing costs low, the markets seem to be
flooded with liquidity. Many are hoping that these low borrowing
costs will ensure high levels of consumption, and thus jumpstart
the economy heading into 2013.
At least on some level, this appears to be working as many are
starting to spend again. After all, there is rising consumer
confidence, an increase in employment levels and growing personal
consumption expenditure (PCE) that the U.S. economy has seen of
late. With this backdrop one could argue that the much-condemned
efforts of the central bank have not gone in vain (read
Spending is Surging: Stock Up on These ETFs
Everything seemed to be going as planned until 'Superstorm'
Sandy showed up and created havoc mostly along the eastern region
of the US. While it had its effects in almost all sectors of the
economy, primarily the energy and industrial sector have been the
worst affected (see
Time to Buy the Oil Equipment ETFs?
Nevertheless, the industrial sector seemed to be enjoying a
decent run this fiscal both in terms of earnings growth and stock
market performance. Industrials are one of the leading
contributors in terms of earnings growth as well as the bull run
in the market (read
State Street Debuts Unique Momentum and Value
However, the industry had faced a severe hiccup on account of
the hurricane as industrial production slumped by 0.4% in October
after an increase of 20 basis points in the preceding month
(according to the data provided by the Federal Reserve).
This has gone a long way in hurting investor confidence as the
sector companies witnessed sell offs after the hurricane episode.
Nevertheless, with the holiday season approaching and the housing
sector recovery constituting definite key positives going
forward, as the top lines are expected to increase on account of
increased demand for intermediate products.
Investors can easily target the producers of these
intermediate products by playing the industrial sector. This
segment could be a less bid up way to play the market, while
still targeting positive trends (see
ETFs That We Are Thankful For
Given this, a look at a top ranked industrial ETF could be the
way to target the best of the segment with lower levels of
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook of the underlying industry, sector,
style box, or asset class. Our proprietary methodology also takes
into account the risk preferences of investors as well.
The aim of our models is to select the best
within each risk category. We assign each ETF one of five ranks
within each risk bucket. Thus, Zacks Rank reflects the expected
return of an ETF relative to other ETFs with similar level of
Using this strategy, we have found an ETF Ranked 2 or 'Buy' in
the Industrial Sector which we have highlighted in greater detail
Industrial Select Sector SPDR (
Launched in December of 1998, XLI tracks the performance of
companies listed in the S&P 500 which belong to the
industrial sector. The ETF has had a decent run so far this year
returning around 9% as of 20th November 2012, compared to the
S&P 500 returning 10.35% for the same time period (see more
Zacks ETF Center
The ETF had been hit hard by the fall in industrial production
which has affected the overall sector. This coupled with the
sharp post-election sell-off from the equity markets have led to
lose a bit in AUM for much of November.
XLI has an asset base of around $3.24 billion and does an
average volume of around 14 million shares daily. It charges
investors 18 basis points in fees and expenses and pays out a
yield of 2.19%. It holds around 64 securities in its portfolio
with around 50% allocation in the top 10 holdings (read
Forget Interest Rate Risk with These Bond
In terms of individual holdings, General Electric Co. accounts
for a lion's share of its portfolio with around 12.5% allocation.
United Technologies Corp (5.19%), Union Pacific Corp., (4.80%)
and 3M Co. (4.54%) are some of its other top holdings.
From a risk analysis point of view, XLI has a relatively lower
annualized standard deviation of 22.50%. This reflects our
risk outlook for the ETF along with a
Zacks Rank of 2 or 'Buy'
, suggesting this could be a less volatile way to target the
market as we head into 2013.
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SPDR-INDU SELS (XLI): ETF Research Reports
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