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Not Your Ordinary Industrials ETF


Exchange traded funds tracking the industrial sector have been solid performers this year.

Buoyed by strength in the aerospace and defense industry and a rotation to value sectors away from momentum, industrial ETFs have rewarded investors, rebutting claims that after last year’s aerospace and the broader industrial complex was fully and fairly valued. [Hard to Go Wrong With Aerospace ETFs]

The Industrial Select Sector SPDR (XLI) , the largest industrial ETF by assets, is higher by 3.2% year-to-date, while the rival Vanguard Industrials ETF (VIS) is up 2.9%. XLV and VIS are among the more familiar industrial ETFs, but a new fund offers a unique way of accessing this old line sector.

The First Trust RBA American Industrial Renaissance ETF (AIRR) debuted in March and with a focus on mid- and small-cap industrials, offers an alternative to its large-cap heavy rivals. AIRR also offers a twist: An almost 10% allocation to community bank stocks. [Community Bank ETF Soars]

AIRR tracks the Richard Bernstein Advisors American Industrial Renaissance Index.

“RBA believes there are increasing reasons to expect that the United States may regain industrial market share, based on a number of factors, including: access to cheap energy sources; the relative stability of the U.S. market compared to many emerging markets; and growing availability of bank financing for manufacturers,” according to a First Trust Statement.

“Smaller U.S. banks generally have strengthening balance sheets and continue to aid U.S. capital formation. Admittedly, traditional banking typically has lower profitability ratios, but smaller U.S. banks do not need massive trading infrastructures and unnecessary global risk-taking to be profitable,” according to First Trust.

The Richard Bernstein Advisors American Industrial Renaissance Index culls potential constituents from the Russell 2500 Index, eliminating companies that are not direct manufacturing, infrastructure or community banking plays.

AIRR’s bank allocation is capped at 10% and the ETF’s bank holdings hail from states that viewed as industrial and manufacturing heavy.

With a median market value of $1.2 billion and no holdings with market caps in excess of $8.46 billion, AIRR does a fine job of dodging large-caps as its mission statement dictates.

Even with the emphasis on mid- and small-caps, AIRR’s valuations are not too excessive relative to rival industrial ETFs. For example, the new First Trust offering, which has quickly amassed $33.8 million in assets, sports a P/E ratio of 20.2 and a price-to-book ratio of 2.06. Those numbers on XLI are 17.2 and 3.28. [Industrial ETFs Captivate Investors]

AIRR Top-10 Holdings


Table Courtesy: First Trust