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ETF Specialist

With Industrials Firms Lagging in Recent Market Rally, Quality Is on Sale

We outline the best ETF to exploit this mispricing.

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Over the past three months, large- and mid-cap U.S. stocks have rallied nicely. The large and liquid exchange-traded fund that tracks the S&P 500 Index,  SPDR S&P 500 (SPY), has had a total return of 10.1% over that period, led by significant gains in the energy, financials, and tech sectors. Several sectors have lagged the broad benchmark, and one of those laggards--the industrials sector--now looks compelling, valuationwise.

The best ETF for investing in large- and mid-cap industrials names is  Industrial Select Sector SPDR (XLI), a concentrated, market-capitalization-weighted fund that holds just 60 names. The fund trades at 92% of its fair value at a time when SPY trades at 95% of its fair value. What's more, XLI offers a very high-quality portfolio. Fully 93% of the assets in XLI are invested in firms with economic moats, which Morningstar's equity analysts consider to be durable competitive advantages. XLI has recorded a total return of 8.1% over the past three months, underperforming SPY by fully 200 basis points.

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