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ETF Specialist

Parsing the Industrials Landscape in ETFs

There is a small number of high-quality industrials-sector ETFs from which to choose.

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Even as the exchange-traded fund market continues to mature, industrials-sector ETF offerings remain remarkably scarce relative to other sectors. While we believe tactical investors would benefit from seeing ETF providers further slice and dice the sector--for instance, in our book, an ETF with pure exposure to firms that make machinery would be a great addition to the space, because it would give investors a fund more tightly tethered to the ups and downs of the global economy--there remain several attractive options out there right now for investors. We would caution that, for most investors, such niche funds are rarely an appropriate choice. An industrials-sector ETF would be most appropriate as a satellite portion of a diversified equity portfolio only for those investors with a high-conviction thesis related to the space.

Investing in cyclical names at the right time can be very rewarding for investors, as cyclical stocks tend to outperform the broader market at certain times in the cycle. And sector ETFs can be a great way to play a recovery, because they allow investors to avoid single-stock risk and benefit from overall, industrywide trends. Recently posted economic data show promising signs of recovery that bode well for investors in the industrials sector: Manufacturing activity has steadily increased, companies have rebuilt inventories, and exports have grown. Obviously, it remains early in the economic recovery, and the risk of a double-dip recession cannot be discounted. At the same time, assuming that the recovery continues, industrials names may well be the place to be for the next 12 to 18 months. Certainly for the first half of 2010, the industrials sector enjoyed significant outperformance relative to the S&P 500.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.