The Industrial Revolution: Solid Sector ETF Ideas

The Industrial Select Sector SPDR Fund XLI, the largest exchange traded fund dedicated to the S&P 500's sixth-largest sector weight, is up more than 17 percent year-to-date. That's good for the second-best performance among the sector SPDR ETFs with only the Energy Select Sector SPDR XLE topping XLI.

Industrials aren't a glamor sector on par with consumer discretionary, healthcare or technology, but lack of glitz clearly is not affecting XLI's ability to deliver for investors. In fact, XLI's recent price action and those of rival industrial ETFs, such as the Vanguard Industrial ETF VIS and the Fidelity MSCI Industrials ETF FIDU, suggests more upside could be on the way.

Here-And-Now Market

The here-and-now market environment favors industrials. Industrials are a cyclical group and cyclicals historically outperform in the latter stages of the business cycle. Additionally, cyclical groups have historically been durable in the face of rising interest rates. With the possibility of the Federal Reserve boosting interest rates next month and perhaps multiple times next year, industrials make for an ideal sector bet.

“The industrials sector gathered $403 million of new money in October according to Factset data and we have rankings on 20 different ETFs. This is a sector that could also benefit in 2017 as CFRA equity analyst Jim Corridore expects rising defense budgets and a likely end to sequestration to provide a post-election catalyst for the aerospace and defense sub-industry, which is sizable in popular ETFs,” said CFRA Research in a note out Tuesday.

Trump Impact

Speaking of the government's impact on the industrial sector, aerospace and defense stocks are leading industrials on speculation President-elect Donald Trump is targeting significant increase in defense spending.

Four of the ETFs hitting all-time highs Tuesday were industrial funds, including one dedicated aerospace and defense ETF. Investors should be mindful that broad industrial ETFs, such as FIDU, VIS and XLI, aren't mirror images of each other.

In addition, there are allocation differences. VIS and FIDU have less exposure to aerospace & defensive companies and more exposure to road & rail companies than XLI, due in part to having more small- and mid-cap companies,” adds CFRA Research.

The research firm has Overweight ratings on all three ETFs.