The "Industrials" sector is a broad term that covers a variety of different industries including the Aerospace and Defense industry and the Transportation industry. As part of our series on the "Best in Class" recommendations for ETF sectors, we will choose the best ETFs in several categories in the overall Industrials sector.
Broad Industrials ETFs
Our U.S. Industrials Pick – Our pick for the broad U.S. Industrials sector is the Industrial Select Sector SPDR Fund (XLI). XLI is by far the largest ETF in the group with a massive $4.0 billion in assets and it also has the lowest expense fee at 0.20%. Figure 1 illustrates that the performance among the three largest ETFs in this group is very similar so we are going with the largest ETF in the group that also has the best liquidity and lowest fees. We should note, however, that the Vanguard Industrials Index Fund (VIS) may be the best choice for Vanguard clients if they can trade the ETF without any commissions since it has substantial assets under management and nearly identical performance relative to XLI.
We should note that XLI is heavily weighted towards a few large U.S. industrial stocks such as GE (10.9%), United Technologies (5.9%), and Caterpillar (5.2%). Investors may want to get more exposure to smaller Industrials stocks that might be more nimble in taking advantage of various opportunities. In this regard, we like the idea of the PowerShares S&P SmallCap Industrials Portfolio (PSCI) as a supplementary investment vehicle that holds only small-cap Industrials stocks. The only problem is that this fund has only about $35 million in assets at present, which is below our suggested minimum asset level of $50 million.
The Rydex S&P Equal Weight Industrials ETF (RGI) also provides an interesting alternative to XLI. The Rydex RGI fund holds large-cap industrials stocks, but it is an equal-weighted index of 59 stocks. This reduces the weight of the mega-cap Industrials stocks like GE to the same level as other Industrials stocks. However, RGI is very close to our $50 million minimum asset level, meaning investors should tread carefully with this ETF.
Figure 1: Comparison of Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials Index Fund (VIS), and iShares Dow Jones US Industrial Sector Index Fund (IYJ)
Aerospace and Defense ETFs
Our Aerospace/Defense Pick – Our pick for the Aerospace & Defense ETF sector is the iShares Dow Jones US Aerospace & Defense Fund (ITA) because it has (1) the highest assets under management, (2) the lowest expense fee of 0.47%, and (3) better recent performance. As Figure 2 illustrates, ITA has outperformed its competitor PowerShares Aerospace & Defense Portfolio (PPA) in recent years, although most of that outperformance occurred more recently in the last 1-1/2 years. We like the fact that PPA has broader diversification with 53 stocks versus 32 stocks for ITA, but those extra stocks in PPA have not helped its performance relative to ITA.
Figure 2: Comparison of iShares Dow Jones US Aerospace & Defense Index Fund (ITA) and PowerShares Aerospace & Defense Portfolio (PPA)
Our Transportation Picks – The only choice for a broad transportation ETF is the iShares Dow Jones Transportation Average Index Fund (IYT). We still view this ETF as a good choice, however, since it has a large amount of assets under management and a broad mix of transportation stocks. The fund has a weight of 31.38% on railroads, 22.51% on trucking, 20.04% on delivery services, 8.78% on marine transportation, 7.61% on airlines, 4.89% on transportation services, and 4.53% on commercial vehicles and trucks.
Investors can get exposure to more specific transportation sectors with the Guggenheim Airline ETF (FAA) and Guggenheim Shipping ETF (SEA), but neither of these ETFs exceeds our recommended minimum asset level of $50 million. There are two relatively new auto sector ETFs, but neither has gained any traction as yet with little more than their seed money under management. The First Trust Nasdaq Global Auto Index Fund (CARZ) has about $3 million in assets and the Global X Auto ETF (VROM) has about $1.5 million in assets.
Global Industrials ETFs
Our Global Industrials Pick -- We generally like to recommend ETFs with globally-listed stocks, rather than ETFs that only have U.S.-listed stocks, because investors are typically far too light on their global equity exposure compared with the optimal levels shown by academic studies. In addition, with the process of globalization and the big opportunities in overseas markets, we believe it makes sense to gain increased exposure to overseas investment opportunities. ETFs are an ideal way to get overseas equity exposure because all U.S.-listed ETFs trade in terms of dollars, which keeps things simple in one’s brokerage account. The ETF fund takes care of all the underlying currency problems of buying and selling stocks listed overseas.
Figure 3: Comparison of iShares iShares S&P Global Industrials Index Fund (EXI) and Industrial Select Sector SPDR Fund (XLI)
With our global preference, our pick for the overall Industrials sector is the iShares S&P Global Industrials Index Fund (EXI). Figure 3 illustrates that EXI has lagged in performance compared with the U.S.-listed Industrial Select Sector SPDR Fund (XLI) over the past five years. However, a weekly chart shows that the performance between the two funds has been nearly identical over the past year.
Having noted our preference for global technology stocks, however, we should point out that EXI still has a fairly heavy weight of nearly 50% on U.S. stocks. EXI fund literature provides the following geographical weights: U.S. (48.87%), Canada (2.31%), Japan (15.02%), Europe (25.34%), and Other (8.15%). The largest foreign-listed stocks in EXI are Siemens (3.92%), ABB (2.17%), Schneider Electric (1.57%), Mitsubishi (1.32%), Vinci (1.24%), Canadian National Railway (1.23%), Fanuc (1.11%), Philips (1.07%), and Mitsui (1.05%).
We have chosen EXI in this sector since it has about $230 million in assets under management and a reasonable expense fee for a global fund of 0.48%. The two other funds in this group, i.e., SPDR S&P International Industrial Sector ETF (IPN) and iShares MSCI ACWI ex-U.S. Industrials Sector Index Fund (AXID), have asset levels that are too low in our opinion for investors to consider. We like the idea of the AXID, with its holdings of all non-U.S. stocks. However, the fund has only $6 million in assets under management, meaning its longevity is in doubt unless it can quickly gain some traction. In any case, investors may want to take a look at the fund’s holdings in order to gain a better sense of the key non-U.S. Industrials stocks in the event that an investor might want to gain heavier exposure to non-U.S. Industrials by investing directly in these stocks.
We also like the idea of the Global X China Industrials ETF (CHII) in terms of gaining exposure to China-listed Industrials stocks. However, that fund has minimal assets under management of about $8 million and its longevity is therefore in doubt. Investors may want to take a look at the fund’s holdings with the idea of finding and investing directly in some of the top Chinese Industrials stocks.