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Industrial ETFs: A Fear Trade?

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  • VIS
  • IYJ
  • XLI
  • FIDU
  • BA

This article was originally published on ETFTrends.com.

The Industrial Select Sector SPDR (XLI) , the largest exchange traded fund tracking industrial stocks, is down about 3% year-to-date while the S&P 500 is modestly higher. That may not seem like a big deal, but the industrial sector is lagging the broader market by the widest margin seen year, potentially spooking investors about the health of a once favored cyclical sector.

“The Industrials Select Sector SPDR Fund tumbled 3.2 percent last week -- underperforming the S&P 500 Index by the most since June 2009 as the broader gauge went little changed,” reports Bloomberg.

Some big-name industrial stocks have been slammed on fears of an escalating trade war between the U.S. and China, the world's two largest economies. In early April, shares of Dow component Boeing slipped after China announced a 25% tariff on airplanes in response to proposed tariffs by President Donald Trump’s administration on $50 billion worth of imports, including medicines, chemicals and consumer electronics.

Other Offenders Weighing on Industrial ETFs

Boeing is not the only marquee industrial that has been weighing on industrial ETFs in recent days. Another Dow component, Caterpillar Inc., has been doing the same.

XLI's “biggest losses came April 24, when Caterpillar Inc. Chief Financial Officer Brad Halverson threw cold water on the company’s robust first-quarter results by saying they constituted the 'high water mark for the year,'” reports Bloomberg. “That spurred concern the growth cycle has peaked, boding ill for industrials in particular. This is a cyclical sector that tends to perform well amid periods of strengthening global growth.”

Related: How to Find the Best Value in Defensive Sectors

Aerospace and defense stocks, such as Boeing Co. (BA), have been major drivers of the industrial sector’s strength since the 2016 presidential election. Traditional industrial ETFs such as XLI feature significant aerospace and defense exposure.

The allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth. Increased infrastructure spending is also seen as a catalyst for industrial stocks and ETFs.

Investors pulled $1 billion from industrial ETFs last week, according to Bloomberg.

Rivals to XLI include the Fidelity MSCI Industrials Index ETF (FIDU), iShares U.S. Industrials ETF (IYJ) and the Vanguard Industrials ETF (VIS) .

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