Investment thesis: the economic backdrop is positive and the ETF continues to consolidate gains from the powerful post lock-down rally. For now, hold your position.
ETFs now form the backbone of most portfolios. For example, a standard portfolio is composed of some ratio of SPY (for the S&P 500) and TLT (for the long-end of the treasury market). In addition, due to low cost and high liquidity, an increasing number of investors and managers are now favoring ETFs that track broad averages over large mutual funds. Hence, an analysis of a large index-tracking ETF such as the DIA is warranted on Seeking Alpha as this is now a standard investment tool used by many investors.
State Street Global Investors has a group of 11 ETFs that combined represent the entire US economy. Their symbols begin with the two letters XL. Each ETF is one of the largest in its respective sector.
Here is the ETF's industry allocation:
And here are the ETF's 10 largest holdings:
Let's first look at the macroeconomic backdrop for this ETF, starting with the latest ISM® PMI® data (author has permission to use the latest months' report):
The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance. Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labor on factory floors due to the COVID-19 omicron variant. Quits rate and early retirements hinder reliable consumption. Panel sentiment remains strongly optimistic, with seven positive growth comments for every cautious comment, up from December’s ratio of 6-to-1.
While still positive, the latest report from Markit Economics is a bit more muted:
January PMI data from IHS Markit indicated a relatively subdued improvement in operating conditions across the US manufacturing sector. The headline figure dropped to the lowest since October 2020, as output growth was muted. Demand conditions also softened further, with new orders rising at the slowest pace since September 2020. Muted client demand was reflected in only a fractional increase in employment. The softer rise in new orders allowed firms to partially work through backlogs of work, which expanded at the slowest pace for 11 months. Nonetheless, firms were at their most upbeat regarding the outlook for output since November 2020.
Meanwhile, inflationary pressures remained marked. The rate of cost inflation eased to the softest for eight months, however, as firms also moderated the pace at which selling prices increased
Other US specific data is positive:
New orders for durable goods are still rising, indicating strong industrial demand.
New orders for capital goods excluding aircraft are rising at a brisk rate.
Now that we've established that the macroeconomic environment is positive, let's take a look at how the XLI has performed relative to a group of 11 peers, which, combined, represent the entire US economy. These are the XLB, XLC, XLE, XLF, XLK, XLP, XLY, XLV, XLY, and VNQ. (11 total):
|XLI's relative performance||4th||6th||9th||10th||8th|
Data from Finviz.com
The ETF's performance has risen in the more recent time periods.
An RRG chart compares the performance of one security to another. Here we're comparing the XLI to the S&P 500. The ETF's performance is "improving."
The weekly chart (left) shows that the ETF is consolidating gains from the post-lockdown rally. The daily chart (right) shows there's support in the ~98 range.
The XLI is a hold. The economic backdrop is positive and the ETF is consolidating gains. However, set a sell-stop in the 97.5 area since a break below that level would likely signal a further decline.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.