Investigating Industrial ETFs – Good Time to Invest?

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The Industrial Select Sector SPDR (NYSEArca: XLI), the largest exchange traded fund tracking industrial stocks, and other major cap-weighted industrial ETFs are mostly flat this year, but some market observers believe opportunity remains with this highly cyclical sector.

Aerospace and defense stocks, such as Boeing Co. (NYSE:BA), have been major drivers of the industrial sector's strength since the 2016 presidential election. Traditional industrial ETFs such as XLI feature significant aerospace and defense exposure.

The allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth. Increased infrastructure spending is also seen as a catalyst for industrial stocks and ETFs.

“In general, the global economic indicators that we track continue to suggest growth and stability in 2018, which should be favorable for the industrials sector,” reports ETF Daily News. “Increases in growth and output, coupled with corporate tax reforms, will likely increase demand and spending. Additional government spending on defense and infrastructure will also be a potential positive driver of performance in the industrial sector.”

Potential catalysts for aerospace ETFs include include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.

“Fundamental indicators reflect support for the aerospace and defense industry, a key space in the industrials sector,” according to ETF Daily News. “Demand appears strong for aircraft globally. Additionally, with corporate tax-cuts in the U.S., we expect stronger demand for smaller airplanes to grow. Finally, an increase in defense spending domestically should also bode well for the industry.”

Increased infrastructure spending could also boost industrial ETFs. While he was campaigning, President Donald Trump’s pledge to spend $1 trillion shoring up U.S. infrastructure needs was seen as a potential catalyst for the related exchange traded funds. Still, it could take some time for infrastructure ETFs to see the full benefit of Trump’s still nascent infrastructure plans.

“Other industrial industries should also benefit from growing demand as global economies improve and stabilize. As demand and output remain stable, transports should see support. A successful infrastructure spending bill would provide a further boost to equities in the industrial sector,” according to ETF Daily News.

Rivals to XLI include the Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU), iShares U.S. Industrials ETF (NYSEArca: IYJ) and the Vanguard Industrials ETF (NYSEArca: VIS).

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