Industrial ETFs Feast on Value Binge
Momentum stocks and exchange traded funds are bouncing back from their March/April doldrums, but that has not put a damper on the rotation to value sectors. Industrials prove as much.
In just the past week, the iShares U.S. Industrials ETF (IYJ) has hauled in $666.3 million in new assets. Since the start of the second quarter, the Industrial Select Sector SPDR (XLI) , has added over $1.7 billion in new assets, making it the sixth-best ETF for second-quarter inflows. [Factory Orders Lift Industrial ETFs]
Among sector ETFs, only the Energy Select Sector SPDR (XLE) , another value sector fund, has pulled in more new assets than XLI this quarter.
Industrial sector earnings “estimates have held up well despite the weakness in Emerging Markets, and both sales and profit growth are forecast to accelerate through 2015. Long term the shale oil & gas revolution is contributing to a manufacturing renaissance that could result in lower costs and higher margins, and thus faster EPS growth,” said AltaVista Research in a recent note.
AltaVista expects XLI constituent firms to post average revenue growth of 3.3% this year on EPS growth of 8.7%. XLI holdings include Dow components General Electric (GD), United Technologies (UTX) and Boeing (BA), which combine for over 20% of the ETF’s weight. Those companies have significant aerospace exposure, an industry that has been an important driver of the industrial sector’s bullishness for over a year.
Despite shrinking government budgets goliath government contractors, like Boeing and Lochkeed Martin (LMT), are benefiting from defense programs that are almost untouchable for politicians looking to trim some budgetary fat. [Government Programs Have Aerospace ETFs Flying]
Year-to-date, the iShares U.S. Aerospace & Defense ETF (ITA) and the PowerShares Aerospace & Defense Portfolio (PPA) are up an average of 7.7%. Over the past month, investors have allocated $32.5 million to PPA, making it the eleventh-best PowerShares ETF for inflows over that time. Said another way, 24% of PPA’s current assets tally has flowed into the fund in just a month.
A near-term risk to the industrial sector could be stretched valuations.
“However, the sector’s P/E multiple appears to have broken out above its post-financial crisis range, making shares appear fully valued,” said AltaVista.
However, the sector is showing signs of breaking out with XLI trading just below its all-time set earlier this month.
“Late last week, the industrial sector broke out above that trading range like a missile leaving the launch pad, breaking its earthly bonds. On Monday of last week, the launch keys were being inserted and turned on, as the Institute for Supply Management’s manufacturing index reported not only an expansion in the manufacturing sector during May, coming in at 55.4, but a slight acceleration over the prior month. Further good news followed on Tuesday as factory orders reported a gain of 0.7 percent for April, which was slightly higher than expected,” said Laif Meidell of American Wealth Management.
Industrial Select Sector SPDR
