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While the U.S. stock market is at its peak with a broad-based rally, the industrials sector seems highly attractive with the Zacks Sector Rank in the top 13%, suggesting outperformance in the months ahead.
We discuss some of the strong reasons for investing in industrial ETFs now.
Manufacturing Surge
As per the latest survey of purchasing managers, manufacturing activity hit a six-year high in August with strong growth in factory sales and rising exports on a soft dollar. The Institute for Supply Management index climbed to the highest level since April 2011 to 58.8% from 56.3% in July, pointing to solid economic growth (read: U.S. Manufacturing Hits Six-Year High: ETFs to Benefit).
However, industrial output fell for the first time in August since January. The drop seems temporary as Hurricane Harvey took a toll on economic activities. Drilling, servicing, and extraction for oil and natural gas along the Gulf Coast were among the worst hit. With solid employment growth and rising consumer confidence, industrial activity is set to rebound in the coming months.
Aerospace & Defense Boost
The sector has been riding higher on the soaring aerospace & defense industry. Trump’s proposal of spending big, recent North Korea missile strikes, Trump’s Afghanistan-friendly military plans, and a wave of consolidation are providing strength to this corner of the industrials sector (read: Aerospace & Defense ETFs Soaring on Northrop-Orbital Deal).
Recovery From Harvey & Irma Loss
Back-to-back hurricanes, Harvey and Irma, caused massive destruction to life, industries, and properties in Texas and Florida. According to a preliminary estimate by Moody's Analytics, the combined damage from the hurricanes could range from $150 billion to $200 billion, same as costs borne for Hurricane Katrina in New Orleans in 2005. This has raised demand for rebuilding efforts in affected areas thereby providing a boost to the industrials sector, which is poised to benefit from continued investments in infrastructure-related assets like railroads, autos and housing (read: What Investors Need to Know About Homebuilding ETFs Post Irma).
Other Factors
Trump has promised to spend a trillion dollars on rebuilding highways, bridges, hospital and other U.S. infrastructure. If enacted, this would be a big boon to industrial stocks. Other factors like an improving housing market, growing mining activities, and a recovering auto and construction industry bode well for the sector.
Strong Earnings Expectation
Per the latest Earnings Trends, the industrial products sector is expected to generate strong earnings growth of 11.6% this year and 13.8% in the next compared with just 0.2% growth recorded last year. Additionally, it will likely be a revenue contributor this year and in the next with growth of 1.7% and 6%, respectively. In comparison, the sector had witnessed revenue decline of 4.3% last year, representing the second-biggest drag to 2016 earnings, trailing energy (see: all the Industrials ETFs here).
Top ETFs to Consider
In view of these reasons, we recommend industrial ETFs to investors. We have highlighted four popular funds that have a solid Zacks Rank #2 (Buy).
This is the most popular ETF in the space with AUM of $10.5 billion and an average daily volume of nearly 9.2 million shares. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with each accounting for less than 7% of assets. About one-fourth of the assets is allocated to aerospace & defense while industrial conglomerates, and machinery make up for a double-digit share each. This ETF charges 14 bps in fees per year and has gained 13.8% so far this year.
This fund follows the MSCI U.S. Investable Market Industrials 25/50 Index and holds 342 stocks in its basket. None of the firms hold more than 7.8% share. Aerospace & defense, industrial conglomerates and industrial machinery are the top three sectors accounting for a double-digit exposure each. VCR charges investors 10 bps in annual fees while volume is moderate at nearly 94,000 shares a day. The product has managed about $3.3 billion in its asset base and has gained 11.8% in the year-to-date time frame.
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report)
This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 93 securities, which are widely spread across components, with none holding more than 2.01% of assets. In terms of industrial exposure, machinery takes the top spot with 21.8% share followed by 15.7% in aerospace & defense and 11.9% in airlines. The fund has accumulated nearly $1.4 billion in AUM and sees a good trading volume of about 181,000 shares a day. It charges 66 bps in fees per year and is up 11.2% this year (read: 6 Sector ETFs Must Buys Now).
This fund tracks the MSCI USA IMI Industrials Index, holding 339 stocks in its basket with none accounting for more than 7.9% share. Aerospace & defense makes up for the top sector with 22.5% share, followed by machinery (19.1%) and industrial conglomerates (17.4%). The product has amassed $356.7 million in its asset base while trades in moderate volumes of around 60,000 shares a day on average. It charges 8 bps in annual fees from investors and has gained 12.7% so far this year.
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5 Solid Reasons to Buy Industrial ETFs Now
While the U.S. stock market is at its peak with a broad-based rally, the industrials sector seems highly attractive with the Zacks Sector Rank in the top 13%, suggesting outperformance in the months ahead.
We discuss some of the strong reasons for investing in industrial ETFs now.
Manufacturing Surge
As per the latest survey of purchasing managers, manufacturing activity hit a six-year high in August with strong growth in factory sales and rising exports on a soft dollar. The Institute for Supply Management index climbed to the highest level since April 2011 to 58.8% from 56.3% in July, pointing to solid economic growth (read: U.S. Manufacturing Hits Six-Year High: ETFs to Benefit).
However, industrial output fell for the first time in August since January. The drop seems temporary as Hurricane Harvey took a toll on economic activities. Drilling, servicing, and extraction for oil and natural gas along the Gulf Coast were among the worst hit. With solid employment growth and rising consumer confidence, industrial activity is set to rebound in the coming months.
Aerospace & Defense Boost
The sector has been riding higher on the soaring aerospace & defense industry. Trump’s proposal of spending big, recent North Korea missile strikes, Trump’s Afghanistan-friendly military plans, and a wave of consolidation are providing strength to this corner of the industrials sector (read: Aerospace & Defense ETFs Soaring on Northrop-Orbital Deal).
Recovery From Harvey & Irma Loss
Back-to-back hurricanes, Harvey and Irma, caused massive destruction to life, industries, and properties in Texas and Florida. According to a preliminary estimate by Moody's Analytics, the combined damage from the hurricanes could range from $150 billion to $200 billion, same as costs borne for Hurricane Katrina in New Orleans in 2005. This has raised demand for rebuilding efforts in affected areas thereby providing a boost to the industrials sector, which is poised to benefit from continued investments in infrastructure-related assets like railroads, autos and housing (read: What Investors Need to Know About Homebuilding ETFs Post Irma).
Other Factors
Trump has promised to spend a trillion dollars on rebuilding highways, bridges, hospital and other U.S. infrastructure. If enacted, this would be a big boon to industrial stocks. Other factors like an improving housing market, growing mining activities, and a recovering auto and construction industry bode well for the sector.
Strong Earnings Expectation
Per the latest Earnings Trends, the industrial products sector is expected to generate strong earnings growth of 11.6% this year and 13.8% in the next compared with just 0.2% growth recorded last year. Additionally, it will likely be a revenue contributor this year and in the next with growth of 1.7% and 6%, respectively. In comparison, the sector had witnessed revenue decline of 4.3% last year, representing the second-biggest drag to 2016 earnings, trailing energy (see: all the Industrials ETFs here).
Top ETFs to Consider
In view of these reasons, we recommend industrial ETFs to investors. We have highlighted four popular funds that have a solid Zacks Rank #2 (Buy).
Industrial Select Sector SPDR (XLI - Free Report)
This is the most popular ETF in the space with AUM of $10.5 billion and an average daily volume of nearly 9.2 million shares. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with each accounting for less than 7% of assets. About one-fourth of the assets is allocated to aerospace & defense while industrial conglomerates, and machinery make up for a double-digit share each. This ETF charges 14 bps in fees per year and has gained 13.8% so far this year.
Vanguard Industrials ETF (VIS - Free Report)
This fund follows the MSCI U.S. Investable Market Industrials 25/50 Index and holds 342 stocks in its basket. None of the firms hold more than 7.8% share. Aerospace & defense, industrial conglomerates and industrial machinery are the top three sectors accounting for a double-digit exposure each. VCR charges investors 10 bps in annual fees while volume is moderate at nearly 94,000 shares a day. The product has managed about $3.3 billion in its asset base and has gained 11.8% in the year-to-date time frame.
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report)
This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 93 securities, which are widely spread across components, with none holding more than 2.01% of assets. In terms of industrial exposure, machinery takes the top spot with 21.8% share followed by 15.7% in aerospace & defense and 11.9% in airlines. The fund has accumulated nearly $1.4 billion in AUM and sees a good trading volume of about 181,000 shares a day. It charges 66 bps in fees per year and is up 11.2% this year (read: 6 Sector ETFs Must Buys Now).
Fidelity MSCI Industrials Index ETF (FIDU - Free Report)
This fund tracks the MSCI USA IMI Industrials Index, holding 339 stocks in its basket with none accounting for more than 7.9% share. Aerospace & defense makes up for the top sector with 22.5% share, followed by machinery (19.1%) and industrial conglomerates (17.4%). The product has amassed $356.7 million in its asset base while trades in moderate volumes of around 60,000 shares a day on average. It charges 8 bps in annual fees from investors and has gained 12.7% so far this year.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>