XLI: A great fund for bets on real economic growth stimulus

While the world likes to focus on the technology sector and digitization, it is the industrial sector that is driving significant economic growth. Companies in this sector are critical to infrastructure globally, making their performance an important factor of what’s next Unfortunately, however, momentum in the space has stalled in recent months, and it could either stall for another run higher or go through a peak formation. If you think this is more of a refreshing break and want to gain exposure to the sector, then you may want to consider the Select Industrial Sector SPDR Fund (NYSEARCA: XLI).

This is a sector exchange-traded fund that tracks the Industrial Select sector index. The fund provides targeted sector exposure to some of the larger industrial players driving the world forward. Companies in the fund range from aerospace and defense to industrial conglomerates, transportation infrastructure, materials processing, machinery, durable goods manufacturers, logistics and commercial facilities management, among others.

A look at holdings

If you want to know what XLI is all about, look no further than the top stocks. These companies are giants in terms of their importance to economic growth and the way we live our lives. No position exceeds 4.78% of the fund, with a fairly spread mix of companies in the lead.

What do these companies do? General Electric has been a leader in American industrial business for more than 100 years, operating in four main segments: aviation, energy and water, renewable energy and healthcare. Caterpillar Inc. is the manufacturer of most heavy machinery and construction equipment in the world. Uber Technologies is best known for its ride-sharing business. Union Pacific Corporation is an American railroad network. And Honeywell International Inc. manufactures everything from aircraft parts to the construction of hand dryers and face masks.

The composition of the sector

When we dig deeper, we find that the sector has a good range of sub-industries.

Aerospace and Defense is the largest allocation and covers companies whose business primarily revolves around the design, production and maintenance of aircraft, spacecraft and defense systems. It reflects the cutting edge of technology and national security. Automobiles comes in at No. 2 and includes companies ranging from espresso makers to construction equipment and industrial machinery manufacturers. And none of that matters if there isn’t Ground Transportation at No. 3. That includes the giants that run the nation’s railroads, heavy-haul companies, and their logistics consultants.

Comparison

While XLI stands out as a concentrated sector ETF in the industrials space, it’s certainly not unique. A fund worth comparing is the Vanguard Industrials ETF (VIS). This ETF tracks the MSCI US Investable Market Industrials 25/50 Index. When we look at the price ratio between the XLI and the VIS, we find that the two were in a wide range, but it is not clear which one has the greater performance advantage over the other. In other words, both do the job in terms of broad following.

Pros and cons

On the plus side? It is targeted. When you buy XLI, you are strategically investing in an innovative industry that plays a crucial role in the real economy. The XLI portfolio holds the most dynamic companies in industries that drive economic growth. These industries include aerospace and defense, vehicles and parts, machinery, transportation, construction and agricultural equipment, and all other industrial manufacturing companies. Investing in XLI means owning shares in industry leaders, the top dogs in their respective sectors, with solid track records, dominance and growth potential.

However, it is this concentration and sector exposure that brings risk to XLI. The industrial sector is well known for its significant cyclical nature – it is commonly associated with wider economic cycles, experiencing ups and downs along these. When the economy slows or goes into recession, demand for the products and services of many industrial companies is likely to as well. In addition, there is a risk that disruptive technologies will overtake industrial companies or change consumer tastes towards new patterns of using the goods and services of these companies. Consequently, the continued profitability and market position of such companies could become at risk. Given XLI’s holdings of traditional industrial companies, this could negatively impact the fund’s overall performance.

Conclusion

For those investors looking to bet on real economic growth, XLI as an industrial play makes sense. I think the sector can certainly have years of performance ahead of it, although I personally would like to wait a bit before making a focused bet given my own personal views on the risks of an economic slowdown. However, if you want to get rid of Tech, this fund can help you.