Hopes of high capital spending boost industrial ETF

on Apr 7, 2014
Updated: Oct 21, 2019

iNVEZZ.com Monday, April 7: The Industrials Select Sector SPDR Fund (NYSEArca:XLI), the biggest exchange traded fund investing in machinery producers and transportation stocks, ended last week 1.57 percent higher as investors turned to industrials amidst hopes of higher capital spending this year. The sector is also experiencing one of the fastest rates of profit growth in the market with aluminium-producer Alcoa opening the first-quarter earnings season tomorrow.

Companies such as transportation giant Union Pacific Corp and equipment manufacturer Caterpillar are leading the surge in share prices as investors welcome signs of a strengthening US economy. According to Drew Nordlicht from High Tower Advisors, industrial companies are a better bet for 2014 than banks and retailers due to the prospects for increased investment in infrastructure. “You’re seeing the beginning of investors shifting money ahead of a wave of spending,” Nordlicht told Bloomberg in an interview last week. “The expectation is, as the economy begins to kick into a higher gear, corporate America will utilize the amount of cash to spend on capital expenditures. The industrial is direct beneficiary of that.”

US companies have reined in on capital spending over the last five years, barely allocating enough to replace worn-out or depreciated machines, factory buildings and equipment, according to a report from Societe Generale. “Today’s capital stock [is] older than at any point since 1964,” writes Aneta Markowska, a New York-based economist at the bank. The underinvestment is expected to be corrected this year, as lower policy uncertainty and competition will pressure chief executives to spend more.

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Analysts also point towards the Economic Policy Uncertainty Index, which has remained close to its long run average for the past five months. The index jumped considerably in 2008 and remained volatile for a long time due to the fiscal standoffs in the US Congress. “History suggests that capital expenditures levels tend to respond to changes in the uncertainly level with a 12-month lag,” Jack Ablin, chief investment officer at BMO Private Bank, said as quoted by Barron’s.

**Industrials Select Sector SPDR Fund (NYSEArca:XLI)**

XLI was launched in 1998 with the purpose of replicating the investment results of the S&P Industrial Select Sector Index. The ETF returned about 40 percent to investors last year but has since lost some steam and delivered a negative 0.27 percent return in the first two months of 2014. It has net assets of about $9.31 billion (₤5.6 billion), drawing in $603 million (₤363 million) last week. The inflows marked a reversal from the first three months of this year, when investors withdrew $1 billion (₤603 million) from the fund. XLI has a gross expense ratio of 0.16 percent and provides exposure to 64 US stocks from the industrial sector.
**As of 15.20 BST buy Industrials Select Sector SPDR Fund at $52.42.**
**As of 15.20 BST sell Industrials Select Sector SPDR Fund at $52.40.**