The Industrials sector ranks fourth out of the ten sectors as detailed in my sector roadmap. It gets my Neutral rating, which is based on aggregation of ratings of 16 ETFs and 18 mutual funds in the Industrials sector as of April 16, 2012. Reports on the best & worst ETFs and mutual funds in every sector and style are on my blog and the Trading Deck.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the worst ETFs and mutual funds within the Industrials sector, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings.
There are no Attractive-or-better-rated ETFs or mutual funds in this sector. Investors seeking exposure to Industrials stocks should buy a basket of Attractive-or-better-rated stocks and avoid paying undeserved ETF or fund fees. Active management has a long history of not paying off.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
* Best ETFs exclude ETFs with TNA’s less than 100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5
* Best mutual funds exclude funds with TNA’s less than 100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Industrial Select Sector SPDR [s: XLI] is my top-rated Industrials ETF and Fidelity Select Portfolios: Defense & Aerospace Portfolio [s: FSDAX] is my top-rated Industrials mutual fund. Both earn my Neutral rating.
Market Vectors Environmental Services ETF [s: EVX] is my worst-rated Industrials ETF and Guggenheim Investments Transportation Fund [s: RYTSX] is my worst-rated Industrials mutual fund. EVX earns my Dangerous rating and RYTSX earns my Very Dangerous rating.
Figure 3 shows that 101 out of the 516 stocks (over 36% of the total net assets) held by Industrials ETFs and mutual funds get an Attractive-or-better rating. However, none of the 16 Industrials ETFs and none of the 18 Industrials mutual funds earn an Attractive-or-better rating.
Mutual fund managers allocate too much capital to low-quality stocks and Industrials ETFs hold poor quality stocks.
Figure 3: Industrials Sector Landscape For ETFs, Mutual Funds & Stocks
Sources: New Constructs, LLC and company filings
Investors need to tread carefully when considering Industrials ETFs and mutual funds, as none are worth buying. Investors seeking exposure to Industrials stocks should buy a basket of Attractive-or-better-rated stocks and avoid paying undeserved fund fees.
General Dynamics Corp [s: GD] is one of my favorite stocks held by XLI and FSDAX and earns my Attractive rating. GD has a strong business model, with an ROIC above 9% for the last 5 years, a feat matched by less than 14% of Russell 3000 companies. GD’s current valuation, at $68.88/share, implies a permanent 20% decline in profits. GD’s consistent history of profits and low expectations for future profitability offer investors appealing risk/reward.
Honeywell International, Inc. [s: HON] is one of my least favorite stocks held by Industrials ETFs and mutual funds and earns my Dangerous rating. HON is a value destroyer with negative economic earnings in 13 of the last 15 years. To justify its current stock price of $58.07, HON needs to grow profits by 7.4% annually for 20 years. Hard to imagine the company meeting those expectations given its lack of profitability to date.
Figures 4 and 5 show the rating landscape of all Industrials ETFs and mutual funds.
431 stocks of the 3000+ I cover are classified as Industrials stocks, but due to style drift, Industrials ETFs and mutual funds hold 516 stocks.
As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.
Figures 4 and 5 show the rating landscape of all Industrials ETFs and mutual funds.
Our sector roadmap report ranks all sectors and highlights those that offer the best investments.
Figure 4: Separating the Best ETFs From the Worst ETFs
Sources: New Constructs, LLC and company filings
Figure 5: Separating the Best Mutual Funds From the Worst Mutual Funds
Sources: New Constructs, LLC and company filings
Review my full list of ratings and rankings along with free reports on all 16 Industrials ETFs and 18 Industrials mutual funds.
Disclosure: I receive no compensation to write about any specific stock, sector or theme.