Industrial ETFs at All-Time Highs: Any Value Left for 2018?

The industrial sector has been on a tear lately with several related ETFs hitting an all-time high on Dec 4, 2017. The largest industrial ETF S&P 500 Industrial Sector SPDR (XLI - Free Report) hasgarnered about $1.92 billion in assets so far in the fourth quarter, as per etf.com.

While the Trump rally has been instrumental in driving the sector higher, an upswing in the manufacturing sector has also added to the strength. Plus, government’s fast progress with the tax reform has fueled the rally in industrial stocks lately.

S&P 500 Industrial Equal Weight Guggenheim ,Direxion Daily Industrials Bull 3X Shares (DUSL - Free Report) ,RBA American Industrial Renaissance ETF FT (AIRR - Free Report) , Industrials ETF Vanguard (VIS - Free Report) and Fidelity Industrials MSCI ETF (FIDU - Free Report) — all hit a high on Dec 4.

Will the Rally Last in 2018?

With this kind of performance, many may see overvaluation issues in the industrial stocks. But overvaluation does not at all take away industrial stocks’ shine at the current level.

Sector Rallying but Not Overvalued

The fund XLI is up about 19% this year (as of Dec 4, 2017), almost in line with 17.2% returns offered by SPDR S&P 500 ETF (SPY - Free Report) and 17.8% profit seen in SPDR Dow Jones Industrial Average ETF (DIA - Free Report) . It is however lower than a staggering 27.8% jump witnessed in PowerShares QQQ ETF (QQQ - Free Report) .

Revival in Manufacturing Sector

Plus, manufacturing numbers point to a recovery in the United States. Notably, the U.S. manufacturing activity growth was at a nine-month high in October and continued to expand in November. Output increased and employment remains steady, as per the source.

 In November, the ISM's purchasing managers index slackened to 58.2 from 58.7 in October and market expectations of 58.4, but stayed above the average for the past year. As many as14 of the 18 industries exhibited growth. 

Tax Reform: A Great Boon for the Sector

Expected tax cuts may provide the wind under the wings for the sector. In any case, the U.S. Senate approved the biggest U.S. tax overhaul in three decades with a 51-49 vote in early December while the House did it in mid-November (read: Senate Passes Tax Bill: 5 ETFs to Buy Now).

As per an article published on the street.com, “expected tax reform legislation could accelerate depreciation” (as indicated by research firm Fundstrat), which in turn would boost capital spending and perk up activity in the sector. Fundstrat also pointed out that regional producers’ manufacturing index readings hinted at higher capex intentions.

Overall Trump Bump

If enacted, the tax reform would be the Trump’s first major legislative win. And if this winning momentum continues, his pledge to pour about $1 trillion dollar in infrastructure spending could also see the light of the day and benefit the industrial sector. Increased outlays will be aimed at improving roads, bridges and telecommunications. The President also promised easing regulations (read: Welcome Trump Era with These ETFs).

ETFs and Stocks to Play

Against this backdrop, we would like to highlight a few hot industrial ETFs that are buy-rated, heading into 2018.

PowerShares DWA Industrials Momentum Portfolio (PRN - Free Report)

The 43-stock fund holds companies that are showing relative strength. Aerospace and Defense takes the top spot followed by Electronic Equipment (read: Steer Clear of GE, Bet on These Industrial ETFs Instead).

PowerShares Dynamic Building & Construction Portfolio (PKB - Free Report)

The underlying index of the fund picks stocks from the Russell 1000 Index that generates positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology. The 93-stock fund puts the highest weight in Machinery followed by Aerospace and Defense, Airlines and Road & Rail.

PowerShares S&P SmallCap Industrials Portfolio (PSCI - Free Report)

This 103-stock fund picks small-cap industrial stocks. Machinery, Commercial Services and Building Products are the top three industries of the fund.

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