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Industrial-Strength ETFs for a Bull Market

Next month, I will be speaking about portfolio construction with ETFs at a conference in Phoenix, and that got me thinking about industrials, which I think might be the most interesting sector when the next bull-market cycle begins.

Based on trading volume, the Industrial Sector SPDR (XLI) would seem to be the most popular way to go, but XLI allocates 16% to General Electric (GE - Get Report), which has been on a brutal run of lagging the market and the sector.

Making GE's lag all the more troubling: Traditionally, the latter part of a cycle is when megacaps such as itself should have the best returns relative to other parts of the market. When new bull markets start, money usually flows into smaller cap stocks, which creates a big-picture headwind for GE.

A smaller-picture headwind could be greater awareness of some of the narrower industrial-sector themes drawing money into specialized stocks and away from companies like GE and other very large caps that dominate XLI.

The first step in building a sector allocation is deciding whether to be equal, overweight or underweight the sector versus the S&P 500. Currently, the industrial sector is 12.16% of the S&P 500.

I would want to be overweight the sector when the next bull does start. I will target a 16% weight for the sector, an overweight but not ruinous bet in case I turn out to be wrong.

Infrastructure is obviously a very important theme, and the iShares S&P Global Infrastructure Index Fund (IGF) is the best ETF proxy for the industrial portion, as opposed to the utilities sector aspect, of the infrastructure theme. IGF is 33% industrials -- and while it is 38% utilities, the fund has tracked closer to the industrial sector. The fund allocates around 10% each to subsectors such as toll roads, airports and pipelines with slightly less to shipping related stocks.
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XLI $49.62 1.90%
PHO $19.25 1.74%
IGF $34.64 0.58%
FAN $10.04 0.00%
GCTAF $17.44 -2.73%


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