Coming into Thursday, just two of the nine sector SPDR exchange traded funds – the Consumer Discretionary Select Sector SDPR XLY and the Health Care Select Sector SDPR XLV – were sporting year-to-date gains.
Among the seven offenders is the Industrial Select Sector SPDR XLI. Though it is not the worst of that bunch, XLI, the largest industrial ETF by assets, is saddled with a 2015 loss in excess of 9 percent. Data points specific to the ETF indicate investors' enthusiasm for the fund is waning.
For example, a recent note from AltaVista Research indicates XLI's shares outstanding count fell 7 percent over the past month and 29 percent over the past year, meaning the fund is losing assets. Year-to-date, XLI has bled nearly $2.1 billion as industrial stocks have been ravaged by the strong dollar and slumping commodities prices.
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Some XLI constituents, including Dow components, General Electric Company GE and Caterpillar Inc. CAT, have significant commodities exposure. Caterpillar is the world's largest manufacturer of mining equipment, in part explaining why shares have slumped 20.6 percent this year. GE is major player in the oil services business, though its stock is down just 2.5 percent year-to-date.
Short sellers have targeted industrial stocks this year as highlighted by the fact that 44 percent of XLI's shares outstanding are currently sold short, according to AltaVista data. It is easy to understand why. Five of XLI's 11 largest holdings, including GE and Caterpillar, are Dow components. Four of those five are among the 19 Dow stocks that have traded lower this year and three of those four are among the 10 Dow stocks that entered Thursday with double-digit year-to-date losses.
On the bright side, XLI's components are expected to generate slightly positive earnings growth this year and AltaVista is estimating the ETF's 2015 price-to-earnings ratio will be 15.5, below the 16.7 forecast for the S&P 500.
“The shale oil & gas revolution is contributing to a manufacturing renaissance that has resulted in rising margins and faster long-term EPS growth. However revenues could be down this year due to the strong USD and the soft economy, evident in the negative estimate revisions. However, the sector's P/E multiple has held fairly steady even as the market's P/E has risen, boosting Industrials' attractiveness to slightly above that of the S&P500,” said the research firm.
AltaVista has a Neutral rating on XLI.
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