Another Sector ETF To Consider This Month

The post-election ebullience surrounding the industrial sector, the fifth-largest sector weight in the S&P 500, has been well-documented. The Industrial Select Sector SPDR Fund XLI, the largest industrial exchange-traded fund by assets, is up more than 11 percent over the past month, and its chart confirms technical bullishness.

Industrials And XLI

The near-term market environment favors industrials. Industrials are a cyclical group, and cyclicals historically outperform in the latter stages of the business cycle. Additionally, cyclical groups have historically been durable in the face of rising interest rates. With the possibility of the Federal Reserve boosting interest rates next month and perhaps multiple times next year, industrials make for an ideal sector bet.

XLI is up 20.4 percent year-to-date, good for third-best performance among the sector SPDR ETFs, and the ETF is CFRA Research's focus ETF for December.

“Jim Corridore, a CFRA equity analyst and head of the industrials team, is positive on commercial aerospace and following a Donald Trump election night victory, have become more positive on defense as well. On the commercial side, Corridore continues to see improving commercial air traffic, driven by recovering global economic trends, as driving strong commercial aerospace results.

“CFRA expects a more positive defense spending environment as well, reflecting Republican control of all branches of government and Trump's stated priorities to increase defense. Corridore thinks this could lead to an end to sequestration and higher defense budgets in coming years,” said CFRA in a recent note.

Holdings And Allocations

XLI allocates 22.5 percent of its weight to scorching hot aerospace and defense stocks, while devoting another 20.5 percent to industrial conglomerates. Transportation stocks from several industries combine for over 23 percent of XLI's weight.

CFRA has Buy or Strong Buy ratings on 39 of XLI's 69 holdings.

“Meanwhile, 29 of the holdings have above-average S&P Capital IQ Quality Rankings of A or higher. CFRA incorporates Quality Rankings as a key risk consideration, believing that companies with consistent earnings and dividend records have less downside potential,” said the research firm.

Dow component General Electric Company GE is XLI's largest holding at just over 10 percent, meaning that stock commands nearly double the weight of XLI's second-largest holding, Dow component 3M Co MMM.

“Trading volume for XLI has picked up in the last month, with 16 million shares trading on a daily basis, up from an average of 11 million over the six-month period. XLI is trading above its 200-day moving average, which is a bullish signal to us. XLI is our most favored ETF in a sector CFRA expects to outperform the broader market in 2017,” said CFRA.