We had earlier made a bullish case for the Industrial Select Sector SPDR (XLI) before starting the year 2013. This was particularly important as it was just ahead of the ISM Manufacturing Data Release — one of the key pieces of economic releases to kick of the New Year. The ETF then was on the verge of a positive breakout and the positive looking data surely fuelled its surge upwards.
Having said this, it is important to consider that XLI has added about 7.55% year-to-date. Of course this includes the massive New Year’s gain, which was on account of the fiscal cliff relief rally.
However, even without taking the relief rally into consideration, it is prudent to note that XLI has added about 5% so far in 2013 (see Three Country ETFs Struggling in 2013).
Nevertheless, with the Industrial Production and capacity utilization data scheduled for release tomorrow, XLI could well be the ETF that captures investors’ attention heading into the long weekend.
Industrial production inched up at a slow pace last time primarily due to the temporary effects of Hurricane Sandy. This also resulted in the U.S. economy shrinking by 0.1% in the fourth quarter.
However, falling levels of unemployment and increase in personal consumption expenditure have given a major boost to auto sales. This in turn might cause industrial production to surge (see Three Surging ETFs with Strong Momentum).
Even with this optimism, the overall earnings picture has been bleak for the industrial sector. Although earnings have witnessed growth, revenue has severely lagged behind even though the construction industry has fared quite well, comparatively.
Nevertheless, with Europe relatively stable and China avoiding a hard landing, the demand for industrial products is expected to rebound in the upcoming quarters, thereby improving the fundamental earnings picture for the overall sector.
With this backdrop let us have a closer look at the Industrial Select Sector SPDR ETF (XLI).
The ETF was launched in December of 1998 and since then has been able to amass an asset base of $4.75 billion. The ETF has an average daily volume of more than 16.5 million shares.
XLI tracks the Industrial Select Sector Index, which measures the performance of all the companies from the S&P 500 Index which belong to the Industrial sector (read Zacks #2 Ranked Industrial ETF in Focus).
The ETF holds 62 securities in its portfolio with almost 50% of its total assets in the top 10 holdings. However, the assets of the ETF in the top 10 holdings have a huge disparity in allocation as more than 12% is invested in General Electric Co (GE). This makes the ETF susceptible to concentration risk, although much of the rest of the portfolio is well spread out.
Some of its other important holdings consist of United Technologies Corp (UTX), Union Pacific Corp (UNP), Caterpillar Inc and 3M Co. The ETF has returned around 15% for the fiscal year 2012 and pays out a dividend yield of 2.12% (read Three Tech ETFs Still Going Strong).
The ETF has a volatility of 22.09% as measured by the annualized standard deviation, which can be considered low especially given the volatility in the equity market in the previous fiscal year. This is reflected in our ‘Low’ risk outlook for the ETF along with a Zacks ETF Rank of 3 or Hold.
Given the hold ranking, the newest data release will surely play a huge role in the ETF’s performance to finish off the week. Things have been going pretty well so far though, so expectations could be high for XLI heading into the weekend.
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