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Be Careful as Industrial Sector ETFs Soar

This article was originally published on ETFTrends.com.

The Industrial Select Sector SPDR (XLI) , which tracks S&P 500 industrial stocks, and rival industrial exchange traded funds are soaring this year. Year-to-date, XLI, the largest industrials ETFs, is higher by 17.50%, but some market observers are advising caution on the cyclical sector.

Industrial stocks, which are currently on pace for their best quarter since the third quarter of 2009, have never led the benchmark U.S. index for a full calendar year.

“I think the movement in the industrials really has been a sigh-of-relief rally that we're not headed into a recession. But this group is going to be really based on what happens with China. Not only the trade tariffs, but is the Chinese economy slowing in addition to or something other than the trade tariffs?,” said Point View Wealth Management's John Petrides in an interview with CNBC.

Aerospace and defense giant Boeing Co. (BA) has been one of the primary drivers of industrial ETFs' upside this year. Looking ahead, the airplane maker anticipates a strong 2019, projecting earnings of $19.9 to $20.1 per share, compared to Wall Street’s expectations of $18.31 per share for the full year 2019 earnings.

The airplane maker delivered a record 806 aircraft last year, compared to 810 that Boeing anticipated in the third quarter. Additionally, the company expects to continue to break records in 2019 with 895 to 905 deliveries.

Being Selective in Industrial Sector

Investors tracking the industrial sector should be selective and focus on legitimate areas of value within the broad industrials complex.

Petrides “likes the airline stocks since he believes the economic backdrop of low unemployment and low oil will lead to an increase in air travel. The NYSE Airline index, which tracks the biggest airline companies, has gained nearly 16 percent this year,” according to CNBC.

The U.S. Global Jets ETF (NYSEArca: JETS) , the only available pure-play fund that focuses on the global aviation industry, is up 12.61% this year.

“Some of the larger companies within the sector are trading at or near their all-time highs, implying that upside for the overall sector could be limited since it is market-cap weighted,” according to CNBC.

For more information on the industrial sector, visit our industrial category.