2023-11-04 10:53:34 ET
Summary
- The Industrials sector in the S&P 500 is diverse, featuring both conglomerates and niche firms.
- The Industrial Select Sector SPDR Fund ETF is recommended as a buy due to its valuation and favorable trends.
- XLI is a large ETF with exposure to various industries and offers a low expense ratio, making it an attractive investment option.
The most diversified sector in the S&P 500 is arguably the Industrials space. It features anything from conglomerates like General Electric (GE) (one of the year’s best-performing stocks) and 3M (MMM), but also niche firms such as RTX Corporation (RTX) and UPS (UPS) & FedEx (FDX). Moreover, the single biggest stock in the sector represents just 4.3% of one popular exchange-traded fund.
I am upgrading the Industrial Select Sector SPDR Fund ETF (XLI) from a hold to buy on valuation and better trends ahead.
YTD Performance Heat Map: Industrials- A Diversified Sector
According to the issuer , XLI seeks to provide investors exposure to the price and yield performance of the Industrial Select Sector Index through a low-cost market-cap-weighted style. The ETF includes companies in the following industries: aerospace and defense; industrial conglomerates; marine transportation; transportation infrastructure; machinery; ground transportation; air freight and logistics; commercial services and supplies; professional services; electrical equipment; construction and engineering; trading companies and distributors; passenger airlines; and building products.
XLI is a large ETF with nearly $14 billion in assets under management and it pays a near-market 1.7% dividend yield as of November 3, 2023. It's an inexpensive way to get exposure to a cyclical and somewhat diversified area of the US large-cap stock market – the annual expense ratio is low at just 0.1% while liquidity is strong considering its 90-day average volume is just shy of 10 million shares and its 30-day median bid/ask spread is narrow at a single basis point. Seeking Alpha’s ETF Grades point to XLI being a risky ETF, however, when analyzing trading metrics over the past several months. Still, share-price momentum is solid with a B rating.
Digging into the portfolio, XLI is not only more equally distributed compared to other more concentrated sector funds, but there’s also exposure across the market-cap spectrum, according to the Morningstar Style Box. More than one-third of the allocation is considered mid-cap and there’s a healthy balance between value and growth. SSGA Funds notes that the 3-5 year EPS growth rate of the portfolio is seen at 11.5% while its current forward price-to-earnings ratio is 17.9 - that makes for an attractive PEG ratio near 1.6 on the 77-holding portfolio.
XLI: Portfolio & Factor Profiles
You might be surprised to see that it’s a Railroad company that's XLI’s largest component. In all the top 10 holdings make up less than 40% of the portfolio and dividends growth trends have recently turned better.
XLI: Top Holdings, Dividend Information
Seeking Alpha
Seasonally, XLI tends to take flight from early November through year-end, according to data from Equity Clock . The below chart shows XLI relative to the S&P 500. On an absolute basis, the Industrials sector has, on average, seen about half of its annual gains in just the final two months of the year, too. So, this is a bullish factor to consider in the near term.
XLI vs SPX: Bullish Relative Returns November-December
The Technical Take
XLI has frustrated both the bulls and the bears over the past couple of years. Notice in the chart below that the ETF put in a bullish false breakdown at its low a bit more than a year ago while a bearish false breakout happened earlier this year. As it stands, support is apparent in the $82 to $86 zone while the $108 to $111 range is resistance.
Also take a look at the high amount of volume by price as indicated by the horizontal bars on the left side of the graph – the bulls have their work cut out for them to bring XLI through this congestion zone, but a breakout above $105 could lead to a quick retest of the all-time high notched this past Q3. A bearish factor right now is a death cross that took place late last week – the shorter-term 50-day moving average crossed below the long-term 200-day moving average for the first time since early 2022. Both trendline indicators are immediately above the current share price, so some near-term back and filling of the relief rally in recent weeks could take place, but the $95 low from March held nicely on a test in October.
Overall, it’s a mixed chart, and I see immediate support in the $95 to $96 area while the $108 to $111 range is resistance.
XLI: Rangebound For Now, $95 Holding as Near-Term Support
The Bottom Line
After underperforming the broad market since March, I am upgrading XLI from a hold to a buy on valuation and favorable seasonal trends, though the technical picture remains mixed.
For further details see:
XLI: Diversified Cyclicals Looking Better On Valuation, Bullish Seasonal Tailwinds (Rating Upgrade)