iShares Plans U.S. Capex ETF

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Includes: FLM, PKB
by: Zacks Funds

iShares - the San Francisco-based market leader in the ETF industry - has roughly 300 products in its portfolio spread across a number of asset classes including equity, bonds, commodities, currency and real estate.

In fact, the issuer has been rolling out new products on varied themes within the individual asset classes as well. Most recently, the issuer has filed several new funds focused on the target date bond ETF space.

Expanding its product portfolio, the issuer has recently filed for an ETF targeting companies that benefit from U.S. capital expenditure plans.

iShares U.S. Capex ETF

As per the SEC filing, the proposed fund looks to track the performance of Morningstar U.S. CapEx Index before fees and expenses. The index includes U.S. companies that are sensitive to increases in capital expenditure in the economic cycle.

The issuer performs fundamental research to classify industries from "least sensitive" to "most sensitive" based on the industry's sensitivity to broad economic CapEx exposure. Companies that fall within the "sensitive" to "most sensitive" industry categories are then selected for inclusion in the fund.

The index primarily includes large and mid-cap companies from sectors such as basic materials, industrials and technology.

How Does it Fit in a Portfolio?

The fund may become a good option for investors seeking to invest in U.S. companies that are sensitive to increases in capital expenditure in the economic cycle. Strong corporate balance sheets, rising business confidence and an improving U.S. economy have raised hopes of increased capital spending by U.S. companies.

However, the improving U.S. picture notwithstanding, these companies are often reluctant to increase their capex spending given global growth concerns. Instead they are deploying their extra cash for share repurchases and buybacks.

Moreover, slumping crude prices aren't helping matters, especially for the U.S. oil and gas industry. Large oil and gas companies are reducing their capital expenditure plans following a sharp slide in oil prices over the past six months.

ETF Competition

The newly filed product seems to be the first such ETF focusing exclusively on U.S. companies sensitive to increases in capital expenditure in the economic cycle. As such, the product is expected to get the first mover advantage.

However, given global growth concerns and slumping oil prices, it might be difficult for the fund to initially garner sufficient assets. With that being said, it also depends on the timing of the fund's launch. If things improve by the time the fund is launched, it might be relatively easier for it to gain assets.

And while there are no direct competitors to the product, investors should note a few more specialized funds which are focused in on capex sensitive areas. These include the First Trust ISE Global Engineering and Construction Index Fund (NYSEARCA:FLM) as well as the PowerShares Dynamic Building & Construction ETF (NYSE:PKB). Once again, these aren't direct competitors, but they could encroach on the proposed iShares fund's space if it is even approved.