Industrial ETFs Look For Better Things In 2016

The Industrial Select Sector SPDR (Sector Spdr Trust Sbi XLI), the largest industrial sector exchange-traded fund by assets, is off 2.6 percent this year, a performance that has XLI in fifth place among the nine sector SPDR ETFs.

Another way of looking at that scenario: XLI is the best of the worst SPDRs. However, that does not obfuscate what has been a disappointing year for XLI and rival industrial ETFs. With economic data generally strong, the Federal Reserve preparing to raise interest rates and the business cycle in the later innings, this should be prime time for industrial stocks to shine, but that has not been the case.

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The Best Of The Worst

To be fair, XLI is improving from the last time Benzinga highlighted the ETF on September 10. On that date, ETF was down 9 percent year-to-date, with short interest equivalent to 44 percent of shares outstanding. That year-to-date loss has been significantly trimmed, and XLI's short interest has fallen to 31 percent of shares outstanding, according to AltaVista Research.

Still, the research firm noted XLI's overall shares outstanding tally has dwindled by 24 percent over the past year, indicating investors have been departing the fund.

AltaVista rates XLI at Neutral, which “indicates that valuations adequately reflect the fundamentals of stocks in these funds,” according to the research firm.

XLI's Drag By Marquee Components

Not surprisingly, XLI has been dragged lower this year by several of its marquee components. Caterpillar Inc. CAT, 3M Co MMM and United Technologies Corporation UTX are three of the 13 Dow Jones Industrial Average members in the red this year. Those stocks combine for 12 percent of XLI's weight.

Not All Holdings Are Dragging XLI Down

Good thing for XLI that General Electric Company GE and Boeing Co BA, a combined 16.2 percent of the ETF's weight, are up an average of 20 percent this year. AltaVista estimates XLI's 2015 price-to-earnings ratio to be 16.2, which is a discount to the 17.8 forecast for the S&P 500.

Related Link: Returning To Industrial ETFs

“The shale oil & gas revolution is contributing to a manufacturing renaissance that has resulted in rising margins and faster long-term EPS growth. However revenues could be down this year due to the strong USD and the soft economy, evident in the negative estimate revisions. However, the sector's P/E multiple has held fairly steady even as the market's P/E has risen, boosting Industrials' attractiveness to slightly above that of the S&P500,” said the research firm.