You’d think that a strong U.S. economy should translate into a strong domestically focused industrial sector, right? Think again.
In a year where the broader stock market is struggling, many industrial sector exchange-traded funds are struggling just a little bit more.
The Industrial Select Sector SPDR Fund (XLI), which is the largest industrially focused ETF with $12 billion in assets under management, is down 1.75 percent year-to-date, although its one-year performance is up 12.9 percent. It comes with an expense ratio of 13 basis points.
The next-largest fund in the group, the Vanguard Industrial ETF (VIS) at $3.4 billion in AUM, is down 1.94 percent year-to-date and its one-year performance is up 11.68 percent. Its expense ratio is 10 basis points. Meanwhile, the John Hancock Multifactor Industrials ETF (JHMI) is down 2.18 percent year-to-date. The fund, which has $29.9 million in AUM and an expense ratio of 50 basis points, is up 12.8 percent during the past year.
Heck, even the sector’s lone inverse ETF isn’t fairing well. The ProShares Ultra Short Industrials (SIJ) recently flipped from positive to negative performance this year, and is down 1.44 percent year-to-date and is at a loss of 25.8 percent during the past year. It’s expense ratio is 95 basis points.
By comparison, the SPDR S&P 500 Index Trust (SPY) is up 0.42 percent.
'Trade Peace'
Several factors account for this sector’s sluggishness, says Amanda Agati, co-chief investment strategist at PNC Financial Services Group. While the purchasing managers’ index and other leading economic indicators are still at fairly high levels, they are beginning to moderate a bit. That suggests the rapid pace of expansion has slowed in the first quarter, which leads to questions about whether this is as good as it’s going to get for the economy.
Additionally, Agati notes, the year-over-year comparisons are a little tougher. The industrial sector did much better in 2017 versus 2016, which is making 2018’s growth look less stellar, even as underlying fundamentals remain strong.
Furthermore, input costs for resources such as oil, steel and other commodities are rising. On top of that, she says, the threat of a major trade war between the U.S. and China (and tariff-related issues with other countries) is a major overhang on the broader market.