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Barchart.com ETF ResearchBarchart.com's Picks for the Industrials, Defense and Transportation Sectors ETF Research written by the Barchart.com ETF Research Team Last Updated: June 8, 2011 Table of Contents
IntroductionThe “Industrials” sector is a broad term that covers a variety of different industries including the Aerospace & Defense industry and the Transportation industry. The best way to define the sector is with Standard and Poors’ “Global Industry Classification Standard® (GICS®),” which is the most widely used standard for separating stocks into industry sectors. The GICS system classifies all stocks using a four-level system that starts with a “Sector” level, such as Industrials. The Industrials sector is then broken down into three Industry Groups: (1) “Capital Goods” companies that provide machinery or equipment that is typically used in a factory environment to manufacture other products, (2) “Commercial and Professional Services” companies that provide a variety of services to businesses, and (3) “Transportation” companies that provide transportation services for products or people. These three Industry Groups are then further divided into the following Industry categories: Capital Goods
Commercial & Professional Services
Transportation
The Industrials sector also includes companies under the category of “Infrastructure.” These companies build infrastructure assets such as energy facilities (power, natural gas, pipelines), water facilities, waste facilities, telecom facilities, and transportation facilities (roads, bridges, airports). We have a separate report on Infrastructure ETFs entitled “Infrastructure ETFs – An Ideal Way to Play the Mega Investment Theme of Global Economic Development.” We will now provide a brief description of the ETFs that fall into various Industrials ETF categories. Broad Industrials ETFsIndustrial Select Sector SPDR Fund (XLI) (issuer web site link) – This fund, launched in December 1998, has about $4.0 billion in assets under management. The fund has an expense fee of 0.20%. The fund tracks the Industrial Select Sector Index, which seeks to provide an effective representation of the industrial sector of the S&P 500 index. The fund holds 59 U.S.-listed stocks. The five top holdings are: General Electric (10.9%), United Technologies (5.9%), Caterpillar (5.2%), United Parcel Services (5.2%), and 3M (4.8%). The industry groups are Aerospace & Defense (25.49%), Machinery (24.27%), Industrial Conglomerates (17.26%), Air Freight & Logistics (9.03%), Road & Rail (8.47%), Electrical Equipment (5.05%), Commercial Services & Supplies (4.49%), Construction & Engineering (2.11%), Trading Companies and Distributors (1.40%), and Professional Services (1.18%). Vanguard Industrials Index Fund (VIS) (issuer web site link) – This fund, launched in September 2004, has about $540 million in assets under management. The fund has an expense fee of 0.24%. The fund tracks the MSCI U.S. Investable Market Industrials 25/50 Index. The fund holds 368 U.S.-listed stocks. The five top holdings are: General Electric (12.1%), United Technologies (4.3%), Caterpillar (3.6%), 3M (3.6%), and United Parcel Service (3.3%). iShares Dow Jones US Industrial Sector Index Fund (IYJ ) (issuer web site link) – This fund, launched in June 2000, has about $500 million in assets under management. The fund has an expense fee of 0.47%. The fund tracks the Dow Jones U.S. Industrials Index. The fund holds 245 U.S.-listed stocks. The five top holdings are: General Electric (11.3%), United Technologies (3.8%), Caterpillar (3.4%), 3M (3.3%), and United Parcel Service (2.8%). PowerShares Dynamic Industrials Sector Portfolio (PRN) (issuer web site link) – This fund, launched in October 2006, has about $95 million in assets under management. The fund has an expense fee of 0.65%. The fund tracks the Dynamic Industrial Sector Intellidex Index. The fund holds 60 U.S-listed stocks. The five top holdings are: Tyco International (2.6%), Union Pacific (2.6%), Caterpillar (2.6%), Sauer-Danfoss (2.6%), and United Technologies (2.5%). First Trust Industrials AlphaDEX Fund (FXR) (issuer web site link) – This fund, launched in May 2007, has about $65 million in assets under management. The fund has a net expense fee of 0.70%. The fund tracks the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index based on fundamental growth and value factors in an attempt to outperform passive indexes. The fund holds 102 U.S.-listed stocks. The five top holdings are: Tyco (1.8%), Alliant Techsystems (1.8%), L-3 Communications Holdings (1.8%), General Cable (1.7%), and Kansas City Southern (1.7%). Rydex S&P Equal Weight Industrial ETF (RGI) (issuer web site link) – This fund, launched in November 2006, has about $50 million in assets under management. The fund has an expense fee of 0.50%. The fund tracks the S&P 500 Equal Weight Index Industrials. The fund holds 59 U.S.-listed large-cap industrials stocks with a weight of about 1.7% per stock. PowerShares S&P SmallCap Industrials Portfolio (PSCI) (issuer web site link) – This fund, launched in April 2010, has about $35 million in assets under management. The fund has an expense fee of 0.29%. The fund tracks the S&P SmallCap 600 Capped Industrials Index. The fund holds 92 U.S.-listed stocks. The five top holdings are: CLARCOR (2.8%), Esterline Technologies (2.6%), Toro (2.5%), EMCOR Group (2.5%), and Actuant (2.3%). Figure 1: Comparison of Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials Index Fund (VIS), and iShares Dow Jones US Industrial Sector Index Fund (IYJ) (live chart link)
Our U.S. Industrials Pick – Our pick for the broad U.S. Industrials sector is the Industrial Select Sector SPDR Fund (XLI). XLI is by far the largest ETF in the group with a massive $4.0 billion in assets and it also has the lowest expense fee at 0.20%. Figure 1 illustrates that the performance among the three largest ETFs in this group is very similar so we are going with the largest ETF in the group that also has the best liquidity and lowest fees. We should note, however, that the Vanguard Industrials Index Fund (VIS) may be the best choice for Vanguard clients if they can trade the ETF without any commissions since it has substantial assets under management and nearly identical performance relative to XLI. We should note that XLI is heavily weighted towards a few large U.S. industrial stocks such as GE (10.9%), United Technologies (5.9%), and Caterpillar (5.2%). Investors may want to get more exposure to smaller Industrials stocks that might be more nimble in taking advantage of various opportunities. In this regard, we like the idea of the PowerShares S&P SmallCap Industrials Portfolio (PSCI) as a supplementary investment vehicle that holds only small-cap Industrials stocks. The only problem is that this fund has only about $35 million in assets at present, which is below our suggested minimum asset level of $50 million. The Rydex S&P Equal Weight Industrials ETF (RGI) also provides an interesting alternative to XLI. The Rydex RGI fund holds large-cap industrials stocks, but it is an equal-weighted index of 59 stocks. This reduces the weight of the mega-cap Industrials stocks like GE to the same level as other Industrials stocks. However, RGI is very close to our $50 million minimum asset level, meaning investors should tread carefully with this ETF.
Leveraged & Short Industrials ETFsProShares Ultra Industrials (2X) (UXI) (issuer web site link) – This fund, launched in January 2007, has about $50 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks twice the daily performance of the Dow Jones U.S. Industrials Index. This is effectively a 2X leveraged version of the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ ) described above since they both track the same index, i.e., the Dow Jones U.S. Industrial Index. This vehicle may be appropriate for investors who are looking for leveraged exposure to the Industrials sector, although investors should recognize that they can effectively get the same performance, aside from fees and trading costs, by buying the more liquid iShares Dow Jones US Industrial Sector Index Fund (IYJ ) with 50% margin in one’s brokerage account. ProShares UltraShort Industrials (-2X) (SIJ) (issuer web site link) – This fund, launched in January 2007, has about $8 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks twice the inverse of the daily performance of the Dow Jones U.S. Industrials Index. This is the short version of the ProShares Ultra Industrials (2X) ETF noted above. We would advise staying away from this fund since its longevity is in question with only $8 million in assets under management.
Industrials Subsector – Aerospace and Defense ETFsiShares Dow Jones US Aerospace & Defense Index Fund (ITA) (issuer web site link) – This fund, launched in May 2006, has about $140 million in assets under management. The fund has an expense fee of 0.47%. The fund tracks the Dow Jones U.S. Select Aerospace & Defense Index. The fund holds 32 U.S.-listed stocks. The five top holdings are: United Technologies (9.3%), Boeing (8.2%), Precision Castparts (6.0%), Lockheed Martin (5.9%), and General Dynamics (5.8%). PowerShares Aerospace & Defense Portfolio (PPA) (issuer web site link) – This fund, launched in October 2005, has about $100 million in assets under management. The fund has an expense fee of 0.66%. The fund tracks the SPADE™ Defense Index. The fund holds 53 U.S.-listed stocks. The five top holdings are: United Technologies (7.2%), Boeing (7.1%), Honeywell International (6.9%), Lockheed Martin (5.5%), and General Dynamics (5.4%). Our Aerospace/Defense Pick – Our pick for the Aerospace & Defense ETF sector is the iShares Dow Jones US Aerospace & Defense Fund (ITA) because it has (1) the highest assets under management, (2) the lowest expense fee of 0.47%, and (3) better recent performance. As Figure 2 illustrates, ITA has outperformed PPA in recent years, although most of that outperformance occurred more recently in the last 1-1/2 years. We like the fact that the PowerShares Aerospace & Defense Portfolio (PPA) has broader diversification with 53 stocks versus 32 stocks for ITA, but those extra stocks in PPA have not helped its performance relative to ITA. Figure 2: Comparison of iShares Dow Jones US Aerospace & Defense Index Fund (ITA) and PowerShares Aerospace & Defense Portfolio (PPA) (live chart link)
Industrials Subsector – Transportation ETFsiShares Dow Jones Transportation Average Index Fund (IYT) (issuer web site link) – This fund, launched in October 2003, has about $580 million in assets under management. The fund has an expense fee of 0.47%. The fund tracks the Dow Jones Transportation Average Index. The fund holds 21 U.S.-listed stocks. The five top holdings are: Union Pacific (10.5%), C.H. Robinson Worldwide (8.7%), Fedex (8.2%), CSX (7.7%), and United Parcel Service (7.4%). Guggenheim Arca Airline ETF (FAA) (issuer web site link) – This fund has about $22 million in assets under management. This fund was re-launched in January 2009 due to technical issues when Guggenheim bought Claymore Securities and the fund has yet to come even close to its former level of more than $100 million in assets under management. The fund has an expense fee of 0.65%. The fund tracks the NYSE Arca Global Airline Index. The fund holds 22 U.S.-listed stocks. The five top holdings are: Southwest (17.4%), United Continental (16.8%), Delta Air (14.5%), Alaska Air (4.8%), and Deutsche Lufthansa (4.7%). Guggenheim Shipping Index ETF (SEA) (issuer web site link) – This fund, launched in June 2010, has about $10 million in assets under management. The fund has an expense fee of 0.65%. The fund tracks the Delta Global Shipping Index. The fund holds 30 U.S.-listed stocks. The five top holdings are: Seaspan (4.5%), Pacific Basin Shipping (4.4%), Navios Maritime (4.3%), Ship Finance International (4.2%), and Tsakos Energy Navigation (4.2%). Auto ETFs – There are two relatively new auto sector ETFs, but neither has gained any traction as yet with little more than their seed money under management. The First Trust Nasdaq Global Auto Index Fund (CARZ) (issuer web site link) has about $3 million in assets and the Global X Auto ETF (VROM) (issuer web site link) has about $1.5 million in assets. Our Transportation Picks – The only choice for a broad transportation ETF is the iShares Dow Jones Transportation Average Index Fund (IYT). We still view this ETF as a good choice, however, since it has a large amount of assets under management and a broad mix of transportation stocks. The fund has a weight of 31.38% on railroads, 22.51% on trucking, 20.04% on delivery services, 8.78% on marine transportation, 7.61% on airlines, 4.89% on transportation services, and 4.53% on commercial vehicles and trucks. Investors can get exposure to more specific transportation sectors with Guggenheim’s Airline ETF (FAA) and Shipping ETF (SEA), but neither of these ETFs exceeds our recommended minimum asset level of $50 million.
Global Industrials ETFsiShares S&P Global Industrials Index Fund (EXI) (issuer web site link) – This fund, launched in September 2006, has about $230 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the S&P Global Industrials Index, which is the Industrials subset of the S&P Global 1200 Index. The fund holds 183 globally-listed stocks. The five top holdings are: General Electric (7.5%), Siemens (4.1%), United Technologies (2.8%), United Parcel Service (2.5%), and Caterpillar (2.5%). SPDR S&P International Industrial Sector ETF (IPN) (issuer web site link) – This fund, launched in July 2008, has about $25 million in assets under management. The fund has an expense fee of 0.50%. The fund tracks the S&P Developed Ex-U.S. BMI Industrial Sector Index. The fund holds 153 U.S.-listed stocks. The five top holdings are: Siemens Ag (5.5%), Abb Ltd (2.8%), Schneider Electric (2.0%), Canadian National Railroad (2.0%), and Mitsubishi (1.9%). iShares MSCI ACWI ex-U.S. Industrials Sector Index Fund (AXID) (issuer web site link) – This fund, launched in July 2010, has about $6 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the MSCI All Country World ex-U.S.A. Industrials Index. The fund holds 223 U.S.-listed stocks. The five top holdings are: Siemens (6.4%), Abb Ltd (3.0%), Schneider Electric (2.3%), Mitsubishi (2.1%), and Komatsu (1.9%). Global X China Industrials ETF (CHII) (issuer web site link) – This fund, launched in November 2009, has about $8 million in assets under management. The fund has an expense fee of 0.65%. The fund tracks the Solactive China Industrials Index. The fund holds 40 U.S.-listed stocks. The five top holdings are: China National Building (7.5%), Anhui Conch Cement (7.5%), China Communications Construction (4.9%), Weichai Power (4.6%), and Yangzijian Shipbuilding (4.5%). Figure 3: Comparison of iShares iShares S&P Global Industrials Index Fund (EXI) and Industrial Select Sector SPDR Fund (XLI) (live chart link)
From the Barchart.com ETF Research Team ETP's mentioned: XLI, VIS, IYJ, PRN, FXR, RGI, PSCI, UXI, SIJ, ITA, PPA, IYT, FAA, SEA, CARX, VROM, EXI, IPN, AXID, CHII ________________________Copyright© 2011 Barchart.com, Inc. All rights reserved. 330 South Wells Street, Suite 612, Chicago, Illinois 60606-7110 USA • E-mail: info@barchart.com • Website: www.barchart.com. |
