Industrial Revolution: ETF Showdown Compares PRN vs. XLI

Includes: CAT, PRN, UNP, UPS, XLI
by: Benzinga

By Jason Raznick

It has been a long time since the Industrial Revolution, a period of history that is most often discussed in high school history classes.

Industrial stocks just aren't sexy in an era of iPads, search engines and streaming movies. Nor are industrials the flavor of the day when investors are clamoring for IPOs from Facebook, Twitter and friends.

That's not the point. Industrials still have plenty to offer in the way of alpha and dividends, which is to say the lack of "sexy" doesn't mean a lack of returns. In other words, we've got our own Industrial Revolution in this week's ETF Showdown.

The PowerShares Dynamic Industrials ETF (NASDAQ:PRN) is squaring off against the Industrial Select Sector SPDR (NYSEARCA:XLI). Both ETFs have basically the same number of holdings. PRN has 60 holdings and XLI has 59 holdings, according to the most recent data on the PowerShares and SPDR Web sites.

The difference comes in concentration. Caterpillar (NYSE:CAT) is PRN's largest holding, but only accounts for 2.6% of the ETF's weight. On the other hand, Caterpillar is XLI's fourth-largest holding, but gets a weight of 5.1%. Union Pacific (NYSE:UNP) and United Parcel Service (NYSE:UPS) are the other stocks you'll find in the top-10 of both ETFs.

In terms of expenses, XLI is the clear winner with an expense ratio of 0.2% compared to 0.65% for PRN. Both ETFs are optionable and shortable, though XLI is far more liquid.

So it might seem like XLI is the better bet. Hold on for a minute. There is an issue with XLI and that is five of its top 10 holdings are Dow stocks that combine for roughly 30% of the ETF's weight. That's good when the Dow is performing well, but leaves investors exposed when the Dow slides.

Even with that, an investor might say "I bet XLI has done better than PRN over the past year because the Dow has been strong." Wrong. PRN has outperformed XLI by 12% in the past year and a difference like that between two ETFs that appear so similar on the surface is wide enough to overlook XLI's superior fees and liquidity to declare PRN the winner of this week's ETF Showdown.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.