Industrials: Diverse S&P Sector Is a Market in Itself

Industrials: Diverse S&P Sector Is a Market in Itself

XLI bucks the trend where a few stocks make up the bulk of ETFs covering the sector.

Reviewed by: Staff
Edited by: Staff

The S&P 500 has 11 sectors, and 10 of them are focused at the top—which is to say their top four or five holdings make up a sizeable portion of a sector ETF’s assets. Another way to look at it: 10 stocks make up more than half of the total weighting. 

That's not the case with that other sector—industrials—at least not as reflected in the $18.5 billion Industrial Select Sector SPDR ETF (XLI), where the top 10 stocks make up only 35% of the portfolio.  

The sector has a lot going on under the hood in terms of getting to know what's held in XLI, by far the largest ETF representing the industrials. Incidentally, the Dow Jones Industrial Average, still one of the more popular stock market measures, is not full of “industrial” sector stocks. It is diversified among nine of the 11 sectors, with utilities and REITs excluded.  

Industrials aren't cheap fundamentally, but XLI’s portfolio has five-year projected annual earnings growth of 12%, which is solid. This sector leans heavily on a range of transportation stocks, as well as everything from conglomerates to waste management businesses and a variety of makers of industrial parts and devices. It's not surprising that 35 different ETFs exist to cover either the sector, or sub-segments of it.  

Industrials ETFs That Go Deeper

ETFs that target the latter include the $296 million Invesco Building & Construction ETF (PKB), the $1.1 billion US Global Jets ETF (JETS), which is an airline fund, and the iShares US Aerospace & Defense ETF (ITA), which at $6.2 million in assets is the second largest industrial sector ETF behind XLI. Up 26% for the year through Thursday’s market close, XLI might be the most intriguing research tool for stock-pickers in the large cap space. 

That’s because its mix of stocks is so wide-ranging, it encourages savvy investment advisors and self-directed investors to explore further. With a range of holdings possessing Price-Earnings Ratios from 10 to over 100, this is not a sector to try to paint with a broad brush, whereas some others tend to be more uniform in their valuations and the sector ETFs move based mostly on the fortunes of a small number of stocks. 

XLI doesn't have a single holding of more than 5% of assets, it is the only one of the 11 sectors spider ETFs that can make that claim.

ETFs: Great Research Tools

Shipping and supply chain logistics also have ETFs devoted to them, in addition to small cap stocks within the industrials sector. However, those have much lower asset bases.  

But once again, whereas ETF providers certainly hope that their products will end up with investors pouring assets in, with so many different sub-indexes in this part of the U.S. equity market, it affords investors a chance to get a jump start on their research, particularly at a time when many portfolio managers are looking for something, anything, beyond the “usual suspects” in the technology space to fill portfolios with confident, long-term positions.  

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.