With rising interest a hot topic these days, investors looking to stay long stocks should consider the industrial sector.
As was noted last week, the industrial sector has historically remained sturdy during rising interest rate environments. In terms of performance when rates rise, industrials are second only to consumer discretionary.
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Industrials have lived up to their billing as decent rising rates plays as the Industrial Select Sector SPDR (NYSE:XLI), the Vanguard Industrial ETF (NYSE:VIS) and the iShares U.S. Industrials ETF (NYSE:IYJ) have been solid since May 22, the day Federal Reserve tapering talk really became an everyday topic.
Combined, those three ETFs have about $8 billion in assets under management with XLI controlling the bulk at $5.6 billion. They are large, liquid and, particularly in the case of VIS, cheap. However, when it comes to year-to-date performance, that trio is not the best of the industrial ETF lot.
In fact, industrial ETFs stand as another example of the problems encountered when investors judge ETFs by size. The problem being returns usually get left on the table.
Take the example of the PowerShares Dynamic Industrials Sector Portfolio (NYSE:PRN). The $59.6 million fund has jumped 21.1 percent this year, easily outpacing XLI. PRN is home to many of the same stocks that are found in larger industrial ETFs, including companies that were supposedly going to be vulnerable to sequestration.
That includes Raytheon (NYSE:RTN), General Dynamics (NYSE:GD) and Boeing (NYSE:BA), all PRN top-10 holdings. PRN sets itself apart with larger exposure to small-caps then is generally found in standard industrial ETFs. Small-cap growth and value names combine for about 41 percent of PRN's weight. Liquidity nuts will cringe at PRN's averaged daily volume of 16,200 shares, but the reality is there has only been one day in the previous four quarters where this fund has seen the midpoint of its bid/ask spread fall more than one percent below its net asset value, according to PowerShares data.
Speaking of small-cap industrials, the PowerShares S&P SmallCap Industrials Portfolio (NASDAQ:PSCI) is the pure-play option on that theme. PSCI is home to 84 stocks. It's top-10 holdings include AO Smith (NYSE:AOS), Toro (NYSE:TTC) and Curtiss-Wright (NYSE:CW).
For the year ending June 30, the S&P SmallCap 600 Capped Industrials Index outperformed the S&P SmallCap 600 Index by 420 basis points, according to PowerShares data.
Like PRN, PSCI is not heavily traded (average daily turnover of just over 9,500 shares). However, PSCI is like PRN in another way: It rarely, rarely meaning one day in the previous four quarters, sees the midpoint of its bid/ask spread rise to a one percent premium or discount to NAV.
Not to be forgotten in the industrial ETF conversation is the First Trust Industrials/Producer Durables AlphaDEX Fund (NYSE:FXR). FXR follows the same AlphaDEX methodology that has help an array of other First Trust sector and international ETFs deliver impressive returns.
That includes evaluating potential holdings on factors like price appreciation, cash flow to price and return on assets. FXR, which has $229.1 million in AUM, is up nearly 19 percent year-to-date, a tidy out-performance of some of its larger rivals. No stock accounts for more than 1.9 percent of FXR's weight and the ETF has a median market value of $5.5 billion, indicating decent exposure to mid-cap names.
Top holdings include R.R. Donnelley (NYSE:RRD), ITT Corp. (NYSE:ITT), Trinity Industries (NYSE:TRN) and Chicago Bridge & Iron (NYSE:CBI).
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Disclosure: Author does not own any of the securities mentioned here.
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