Industrial ETFs Ride the Economic Rebound

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Industrial-company shares including General Electric(GE), United Technologies(UTX) and 3M(MMM) have rebounded on expectations the U.S. economy is set to grow for the first time in more than a year and a half.

The best way to tap into the industry is through exchange-traded funds. But not all are created equal.

Federal Reserve Chairman Ben Bernanke last week said the economic slump may be slowing and the housing market has "shown some signs of bottoming" after three years of weakness. The Obama administration forecasts the economy will grow at a 3.5% annual rate by the end of the year after a recession stretched to at least six quarters. Moreover, the CBOE SPX Volatility Index, which measures bearishness among investors, has retreated to its lowest level since September.

General Electric, whose shares have climbed 17% in the past three months, is still down by more than half over the past year, suggesting there's plenty of room to rise. GE, United Technologies and 3M are the three-largest holdings of the Dow Jones U.S. Industrial Sector Index Fund(IYJ), which jumped 18% in April alone.

The most attractive industrial ETF, based on its holdings' price-to-earnings ratio, is the PowerShares Dynamic Industrials Sector Portfolio (PRN), which owns only U.S. stocks. The fund's 60 members trade at an average of 11 times earnings. (Inverse and leveraged funds have been excluded from this review.)

Holdings of PowerShares Dynamic Industrials Sector Portfolio include GT Solar International(SOLR), Chart Industries(GTLS), EnerSys(ENS), Flowserve(FLS) and Goodrich(GR).

PowerShares Dynamic Industrials Sector Portfolio has fallen 0.6% so far this year, lagging behind some of its peers. First Trust Industrials/Producer Durables AlphaDEX Fund(FXR) has risen 5.6% over the same period, but is now potentially overvalued with a price-to-earnings ratio that's twice as high at 22.