An Industrial ETF Hitting New Highs

Perhaps because it is not as glamorous as the technology or health care sector, the industrial sector does not often get the love it deserves. The same can be true of some of the exchange-traded funds dedicated to industrial stocks, but a sturdy industrial sector can be a positive sign for the broader market because of the group's cyclical nature.

So it could prove to be good news that the First Trust Ind/Prod AlphaDEX Fd (ETF) FXR is on the move higher. Actually, FXR was one of just a handful of ETFs to hit record highs on Wednesday. With a modest Wednesday gain, FXR is higher by 8.7 percent year to date.

FXR holds 94 stocks, a deeper bench than some traditional industrial ETFs, such as The Industrial Select Sector SPDR XLI. XLI is the largest industrial ETF by assets. FXR also features exposure to 10 sub-industry groups, again a comparatively large number relative to standard industrial ETFs.

A Different Approach

FXR is a departure from the standard industrial ETFs on multiple levels. In fact, the ETF is the epitome of a smart beta sector fund. The ETF tracks the StrataQuant Industrials Index, which culls industrial stocks from the Russell 1000 Index, ranking those names based on “growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.

The result is a lineup that looks significantly different than those found in old guard industrial ETFs. While those funds are usually heavily allocated to just a few of the most venerable industrial stocks, FXR does not allocate more than 2 percent to any of its holdings. 

FXR offers more than adequate exposure to the hot aerospace and defense trade as that group accounts for 18 percent of the ETF's weight, making it the fund's second-largest industry allocation. Also notable is FXR's 12.3-percent weight to airline stocks at a time when that group is surging on the back of slumping oil prices.

Actually A Mid-Cap Fund

The $1.4 billion FXR favors smaller stocks, a strategy typical of many smart beta funds. FXR's 94 holdings have a median market value of $8.5 billion, well below the weighted average market value of $70.7 billion found on XLI's holdings. However, XLI is outpacing FXR year to date.