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The I's Of March: There's Still A Case For Industrial ETFs

ETF Professor

After being one of last year's best-performing sectors, the industrial sector is again proving solid. To start 2017, The Industrial Select Sector SPDR Fund (NYSE: XLI), the largest exchange-traded fund dedicated to industrial stocks, is higher by 6.6 percent.

The Continuing Case For Industrials

The here-and-now market environment favors industrials. Industrials are a cyclical group and cyclicals historically outperform in the latter stages of the business cycle. Additionally, cyclical groups have historically been durable in the face of rising interest rates. With the possibility of the Federal Reserve boosting interest rates next month and perhaps multiple times next year, industrials make for an ideal sector bet.

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The I's Of March: Industrials And Infrastructure

Add to that, historical data suggest XLI is one of the best-performing sector ETFs in the month of March. XLI is usually the best-performing member of the original nine sector SPDRs in March. XLF, the largest financial services ETF by assets, posts an average March gain of roughly 3.5 percent, according to CXO Advisory data.

“The industrials sector has seemingly fallen in to the shadows as 2017 has gotten underway, following a strong showing in 2016,” said CFRA Research in a recent note. “The sector has appreciated 6.5 percent year-to-date, below the 7.0 percent rise in the S&P 500 Index, and represents only the seventh-best growth of all eleven sectors in the index. This is a bit surprising given President Trump's focus on stimulating the economy via a large infrastructure spending plan. In his address to Congress on Tuesday, Trump promised to spend $1 trillion on infrastructure projects. Although Trump did not state a timeline, it is expected that the spending would be rolled out over 10 years.”

Speaking of the government's impact on the industrial sector, aerospace and defense stocks are leading industrials on speculation President Donald Trump is targeting significant increase in defense spending.

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Further, consensus earnings expectations for the sector have recently contracted. Earnings growth of 2.8 percent in 2017 is nearly 100 basis points below growth expectations at the start of December. Most of the decline is related to the Commercial Services and Supplies industry group, which includes companies like Cintas Corporation, Pitney Bowes, Nielsen Holdings and Dun & Bradstreet, which offer professional services that are unlikely to benefit from an infrastructure bill. Airlines and road and rail are the only industries (within Transportation) that had 2017 earnings estimates revised higher,” according to CFRA.

CFRA has a strong buy ratings on nine industrial stocks, including some XLI constituents. The research firm has an overweight rating on the sector and XLI.

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