The Easy Way to Invest in Industrial Stocks

Industrial stocks had an extremely strong 2017, as the cyclical portion of the U.S. economy started to kick into high gear after years of sluggishness. Investors in many niche areas of the industrial sector managed to score big returns, and many are equally optimistic about the prospects for earnings growth in 2018.

The industrials sector includes a large number of different areas of the market, ranging from aerospace and defense to transportation and general manufacturing. That gives investors hundreds of stocks to choose from. But if you'd rather have one-stop shopping for stocks in the sector, then industrial stock ETFs can be the answer to your needs. With many different industrial stock ETFs, you can pick a broad-based fund or narrow in on specific areas that interest you.

Top industrial stock ETFs

Getting full industrial exposure

Two of the three biggest industrial stock ETFs offer broad-based coverage of the entire sector. Both the SPDR and Vanguard industrial ETFs have balanced portfolio's that include large numbers of different stocks ranging across the entire sector, and offering companies that specialize in areas including aerospace and defense, machinery, railroads, and airlines, as well as industrial conglomerates.

The SPDR has about 70 holdings and an expense ratio of 0.14%, while Vanguard offers a much more diversified portfolio of nearly 350 stocks and a slightly cheaper cost of 0.10% annually. Balance across the various industries that make up the industrial sector is relatively consistent across both ETFs, and, as you can see above, the two ETFs kept pace with a strong market overall in 2017.

Drilling down on certain industrial areas

If you want to hone your exposure to industrials further, then you can find specialized ETFs that pick certain areas on which to focus. The iShares Aerospace & Defense ETF does what its name would suggest, investing solely in defense- and aerospace-related stocks. The ETF owns 40 different stocks, and the top six stocks make up about 45% of the overall portfolio. A 0.44% expense ratio makes the iShares ETF more expensive than its broader-based brethren, but outperformance from aerospace and defense compared to other parts of the industrial sector has led to better returns for investors in this fund.

It's confusing to some investors that transportation stocks fall into the industrial sector when the Dow Jones averages specifically separate them out. Yet the iShares transportation ETF actually seeks to mimic the moves of the Dow Jones Transportation average, owning the 20 components of the Dow Transports. That puts about half of the fund's assets into airlines and air freight and logistics companies, with railroads making up another 25%, and trucking and marine companies making up the remainder. Returns have lagged in the past year, but many see further gains for the industry in 2018.

Finally, the PowerShares ETF looks at companies concentrating on water resources. Strictly speaking, this fund goes beyond industrials, with only a slim majority of assets invested in the sector. Related investments include water utilities as well as healthcare companies focused on maintaining and enhancing water quality. Yet for those who believe that building out industrial capacity to provide clean drinking water for both residential and commercial use can produce outsized returns, the PowerShares ETF offers a different angle on the sector.

Profit from industrial stocks

You can find many other funds that focus on industrial stocks, and many investors will prefer to look at specific companies that they believe will outpace their peers. Nevertheless, these ETFs can give you a good starting point from which to begin to know more about the industrial sector and the stocks that profit from it.

10 stocks we like better than PowerShares Water ResourcesWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and PowerShares Water Resources wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 2, 2018

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.