Meet This Year's Best Industrial ETF

It has been a rough year for industrial stocks and exchange traded funds. The S&P 500's fifth-largest sector weight and the second-largest in the Dow Jones Industrial Average has been stung by the strong dollar and slumping oil prices among other factors.

Those factors and more have sent the Industrial Select Sector SPDR ETF XLI, the largest exchange traded fund tracking the industrial sector, down 3.5 percent year-to-date. However, not industrial ETFs have been duds this year. Take the PowerShares Dynamic Building & Construction Portfolio PKB for example. That ETF is up nearly 12 percent, making it the best-performing industrial ETF on the year. 

It name might imply that PKB is levered to the rally in homebuilders stocks, but a deeper look at the ETF reveals this is not a dedicated homebuilders fund. Rather, PKB includes exposure to “engaged in providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines, and airports,” according to PowerShares.

The takeaway there is that PKB, a strategic beta ETF, is a play on infrastructure spending. PKB follows the Dynamic Building & Construction Intellidex Index, which, like the other PowerShares dynamic sector and industry ETFs, evaluates companies based on price momentum, earnings momentum, quality, management action, and value.

Home to 30 stocks, PKB's real estate exposure comes by way of just two homebuilders stocks – D.R. Horton Inc. DHI and NVR Inc. NVR – and home improvement giants Home Depot Inc. HD and Lowe's Cos. LOW. Those stocks combine for 15.5 percent of PKB's weight. Home Depot is one of just nine members of the Dow Jones Industrial Average with a double-digit gain to this point in 2015.

Although the overall outlook for industrials is murky heading into next year, PKB could once again be an exception to that trend, particularly if government spending on infrastructure projects picks up.

“Construction trends are also on the rise. The Architecture Firms Billing Index was 54.7 in July; any score above 50 indicates an increase in billings. As shown in the chart below, the Architecture Firms Billing Index typically comes out roughly a year ahead of the US Census Bureau’s construction spending reports. The strength of the index augurs for positive growth in construction spending into mid-2016. There may be a short-term pause, but conditions are generally favorable, in my view,” according to PowerShares.