Industrials ETFs Head To Head: XLI Vs. IYJ

The Industrials sector has been attracting a lot of investor attention lately. Strong manufacturing sector jobs and growing investor optimism has contributed to the success of this sector.

Economic Scenario

The Institute for Supply Management’s Manufacturing PMI declined to 58.2 in November compared with 58.7 in October. Manufacturing slowed from the 13-year high of 60.8 reached in September. However, per a CNN article, the sector has added about 138,000 jobs in the first 10 months of this year against a loss of 34,000 jobs in the prior-year period.

Manufacturing has benefited from a weaker greenback. The manufacturing industry depends greatly on exports and a weaker dollar provided support to the sector. However, strong imports from China led to a record monthly trade deficit of $48.7 billion in October. Higher price for imported crude oil also contributed to the widening gap.

The Senate passed its version of the tax reform. The Senate voted 51-49 in favor of the tax reform. Although there are still multiple hurdles to the tax reform becoming a law, Trump called the Senate vote a major victory and the Republican Party unbeatable. The primary concern weighing on the timely passing of the tax reform is that the House and Senate’s respective versions vary significantly. This might then pose some challenges in the passing of the reform without a few key changes.

Let us now discuss two ETFs focused on providing exposure to the sector.

Industrial Select Sector SPDR Fund XLI

This fund seeks to provide exposure to industrial stocks and tracks the Industrial Select Sector Index. It has AUM of $12.9 billion and charges a low fee of 14 basis points a year. It has 68 holdings and bears significant concentration risk as more than 45% of the assets are allocated to the top 10 holdings.

From a sector look, the fund has high exposure to Aerospace & Defense, Industrial Conglomerates and Machinery, with 24.9%, 18.2% and 17.4% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Boeing Co (NYSE:BA) , 3M Co (NYSE:MMM) and Honeywell Intl Inc (NYSE:HON) with 6.8%, 6.1% and 5.1% allocation, respectively (as of Dec 7, 2017). The fund has returned 18.4% in a year and 19.5% year to date (as of Dec 7, 2017). XLI has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares U.S. Industrials ETF IYJ

This fund seeks to provide exposure to industrial stocks and tracks the Dow Jones U.S. Industrials Index. It has AUM of $1.2 billion and charges a fee of 44 basis points a year. It has 204 holdings and bears concentration risk as more than 33% of the assets are allocated to the top 10 holdings.

From a sector look, the fund has high exposure to Capital Goods, Software & Services and Transportation, with 57.1%, 13.5% and 12.6% exposure, respectively (as of Dec 6, 2017). The fund’s top three holdings are Boeing, General Electric (NYSE:GE) and 3M Co with 4.7%, 4.6% and 4.3% allocation, respectively (as of Dec 6, 2017). The fund has returned 20.1% in a year and 20.4% year to date (as of Dec 7, 2017). IYJ has a Zacks ETF Rank #3 with a Medium risk outlook.

Bottom Line

XLI is more popular than IYJ, as is evident from its higher AUM. Moreover, XLI may also be more appealing to investors owing to its cheaper expense ratio. However, IYJ has a more diversified exposure in terms of number of holdings and has been the better performer.

At the same time, both the funds have had relatively similar year-to-date performance. IYJ has returned a mere 0.9% more than XLI so far this year, whereas in a year, it outperformed XLI by 1.7%. Global manufacturing activity has been picking up owing to stronger demand; hence these ETFs are poised to benefit the investors in the long run. Moreover, if the tax reforms are enacted, companies will be able to repatriate a significant amount of profits back into the United States at relatively low tax rates.

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