Here is an interesting anecdote regarding U.S.-focused sector ETFs. Most economic data this year has been solid and the Dow Jones Industrial Average keeps climbing to new all-time highs. However, when looking at the nine sector SPDRs ETFs, investors will find the Industrial Select Sector SPDR (NYSE:XLI) in fifth place year-to-date.
XLI, which is home to $4.82 billion in assets under management, is the fifth-best SPDR ETF despite a year-to-date gain of 15.4 percent. The fund has narrowly outperformed its energy and utilities counterparts while sharply outpacing the Technology Select Sector SPDR (NYSE:XLK) and the Materials Select Sector SPDR (NYSE:XLB).
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It has been low beta sectors that have outperformed over the past three years and maybe that means industrials are ready to take off. If that is the case, investors may want to consider these alternatives to XLI.
First Trust Industrials/Producer Durables AlphaDEX Fund (NYSE:FXR) The First Trust Industrials/Producer Durables AlphaDEX Fund stands as another example of an AlphaDEX ETF that is outperforming some of its cap-weighted rivals. FXR,which has almost $166 million in assets, is up nearly 18 percent year-to-date.
That is an impressive performance given FXR's almost 15.3 percent allocation to aerospace and defense names, a sub-sector that has performed admirably despite various obstacles provided by U.S. policymakers.
Unlike XLI, which devotes 11.6 percent of its weight to just one stock, General Electric (NYSE:GE), no holding in FXR receives an allocation above 1.81 percent. The rub with FXR is that its three-year standard deviation is 120 basis points higher than S&P 500 Industrials Index and year-to-date FXR has been 200 basis points more volatile than XLI. The good news is that FXR's underlying index, the StrataQuant Industrials Index, has outperformed the Russell 1000 Producer Durables Index and the S&P 500 Industrials Index over the past year, three years and five years, according to First Trust data.
PowerShares Dynamic Industrials Sector Portfolio (NYSE:PRN) The PowerShares Dynamic Industrials Sector Portfolio is a prime example of industrials ETF that flies under the radar. Like FXR, PRN is a good example of an industrials ETF that eschews cap weighting to produce solid returns.
PRN's 60 holdings are evaluated on criteria including price momentum, earnings momentum, quality, management action, and value. That has helped the $40.3 million ETF gain over 17 percent year-to-date. No holding accounts for more than three percent of PRN's weight, but the ETF's top-10 lineup underscores the notion that this ETF is one to own not only in a thriving economy, but when oil prices are falling as well.
Four aerospace companies, including Dow component Boeing (NYSE:BA) are found in PRN's top-10, and three of the other top-10 members are airline stocks. For now at least, it is hard to quibble with that mix as PRN's underlying index, the Dynamic Industrials Sector Intellidex Index, has outperformed the S&P 500 Industrials Index and the Dow Jones U.S. Industrials Index over the past 12 and 36 months, according to PowerShares data.
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