Industrial ETF Face-off: PRN Vs IYJ

December 10, 2013

U.S. manufacturing gains produce surplus returns, but no equal playing field.

The U.S. industrials sector has enjoyed an overall hearty rally over the past six months. The Institute for Supply Management (ISM) reporting just this past Monday that expansion in the manufacturing sector posted its highest gains of the year in November.

But when it comes to industrial ETFs, a corner of the equity market where eight ETFs live, performance is not uniform. There is nearly a 15 basis point disparity between the best- and worst-performing industrial ETFs over the past year.

The U.S. is at manufacturing levels not seen since April 2012, and that’s good news. Investing in the U.S. industrials segment is essentially a bet on U.S. economic growth.

Heavily weighted equities include Honeywell, Boeing, 3M and Caterpillar. The largest weighting in the segment, though, is General Electric Corp (GE). GE has enjoyed a steady incline in performance over the past 12 months, helping the segment overall rally.

Take a look at the two best-performing U.S. industrial funds—the PowerShares S&P SmallCap Industrials (PSCI | B-47) and the PowerShares Dynamic Industrials fund (PRN | C-51)—alongside the two worst-performing, the Industrial Select SPDR (XLI | A-89) and the iShares U.S. Industrials fund (IYJ | A-93), over the past year. It’s clear that within this group of ETFs, all have fared well.

2 best 2 worst 1 yr TRR US Ind

Chart courtesy of

Why The Disparity?

The iShares U.S. Industrials fund (IYJ | A-93) has shot up 37.04 percent over the past 12 months. The fund gives broad-based, market-cap-weighted exposure to U.S. industrial stocks, and carves out 11 percent of its portfolio to GE. And it’s performed the poorest among U.S. industrial funds in the past 12 months.

This $1.5 million ETF is among the largest and oldest in the segment. It’s also on the pricier end of the segment, with an expense ratio of 46 basis points.

But IYJ’s underperformance compared with segment peers isn’t just in its cost, it’s in its strategy. The fund is a plain-vanilla, equally weighted basket of U.S. industrial stocks. It holds the big guns, like GE and Boeing, but comes up short in its overall allocation to large-cap stocks.

The Winningest ETF

The PowerShares Dynamic Industrials fund (PRN | C-51) is the champion of U.S. industrials ETFs. Its 52.41 percent spike over the past 12 months shames IYJ and other funds in the sector, and begs a closer look at differences between the strategies.

And therein lays the outperformance.

Although both ETFs lie within the same segment, their strategies are peas of very different pods. While IYJ plays it safe, PRN employs a quantitative strategy that measures growth and value. It passes on the ultra-large-cap stocks like GE.

PRN instead focuses its basket on equally weighted allocations to companies likely to outperform the sector, based on the underlying strategy of the fund. Southwest Airlines, Raytheon and ADT are among the fund’s top holdings.

PRN is also one of the most expensive funds within the segment. Its price tag of 65 basis points is second only to the First Trust Industrials/Producer Durables AlphaDex fund (FXR | B-63), which costs 70 basis points.


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