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Investing in Industrial ETFs

A look at some of the top industrial ETFs.

By Matthew DiLallo – Updated Jun 27, 2022 at 6:49PM

The industrial industry is vital to the global economy. Companies in the sector manufacture and distribute building products and machinery, provide commercial and professional services, and provide transportation services. Given the vital role industrial companies play in supporting the global economy, many rely on the economy to drive growth. So, when the economy slows, it can affect industrial stocks.

However, that's not the case for all industrial stocks. The sector also includes companies that operate in the defense and aerospace industry and those that provide waste management, which are relatively recession-proof. Because of that, investors shouldn't completely dismiss all industrial stocks when concerns about a recession arise.

We've seen how the economy and geopolitics affected the sector in 2022. On one hand, with inflation spiking, the Federal Reserve has started to raise interest rates to cool off the economy, which could affect economically sensitive industrial stocks. Given Russia's invasion of Ukraine, however, defense stocks should benefit from increased defense spending.

The various factors affecting industrial stocks can make it difficult for investors to pick the right stocks that will benefit from the sector's driving forces. One potential solution is investing in an exchange-traded fund (ETF) focused on the industrial sector. Some ETFs offer investors broad exposure across the entire industrial industry, while others focus on one aspect such as aerospace and defense. Here's a closer look at some of the top industrial ETFs.

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Image source: Getty Images.

7 top industrial ETFs

There are more than a dozen ETFs focused on the industrial industry. Here are seven top industrial ETFs:

Industrial ETF Ticker Symbol Assets Under Management (AUM) ETF Focus
Industrial Select Sector SPDR Fund (NYSEMKT:XLI) $15.0 Billion Broad industrials
Vanguard Industrials ETF (NYSEMKT:VIS) $4.4 billion Broad industrials
iShares U.S. Aerospace & Defense ETF (NYSEMKT:ITA) $3.9 billion Aerospace and defense
U.S. Global Jets ETF (NYSEMKT:JETS) $3.4 billion Airlines
SPDR S&P Aerospace & Defense ETF (NYSEMKT:XAR) $1.8 billion Aerospace and defense
Invesco Water Resources (NASDAQ:PHO) $1.8 billion Water
iShares U.S. Transportation ETF (NYSEMKT:IYT) $1.2 billion Transportation

Data source: ETF Database. AUM data as of April 18, 2022.

Industrial Select Sector SPDR Fund

The Industrial Select Sector SPDR Fund is the behemoth among industrial ETFs, with more than three times the assets under management than the next largest industrial ETF. The ETF aims to track the performance of the industrial sector within the S&P 500 Index. The fund held 72 stocks as of early 2022. The ETF's top five industries within the industrial sector were: 

  • Machinery: 19.4% of the fund's holdings
  • Aerospace and Defense: 17.4%
  • Industrial Conglomerates: 12.8%
  • Road and Rail: 11.7%
  • Air Freight and Logistics: 8.2%

Given its focus on industrial stocks within the S&P 500, the ETF holds shares of the largest industrial companies in the country. Meanwhile, it allows investors to gain broad exposure to the top industrial stocks for an ultra-low ETF expense ratio of 0.12%. Those factors make it an excellent ETF for those seeking a low-cost way to invest in the largest industrial stocks.

Vanguard Industrials ETF

The Vanguard Industrials ETF offers even broader exposure to the industrials sector. As of early 2022, the ETF held more than 350 industrial stocks. The fund's top five industries within the industrial sector were:

  • Aerospace and Defense: 16.9% of the fund's holdings
  • Industrial Machinery: 10.3%
  • Industrial Conglomerates: 9.2%
  • Railroads: 8.1%
  • Electrical Components and Equipment: 7.2%

The ETF offers this broader sector exposure for a very low ETF expense ratio of 0.10%. These characteristics make the ETF an excellent option for investors seeking a low-cost way to broadly invest in the industrial sector.

iShares U.S. Aerospace & Defense ETF

The iShares U.S. Aerospace & Defense ETF focuses on holding U.S. companies that manufacture commercial and military aircraft and other defense equipment. The ETF had 35 holdings as of early 2022, led by the following five industrial stocks: 

The ETF offers broad exposure to the aerospace and defense industry, weighted toward the sector's largest players. It also charges a reasonable ETF expense ratio of 0.42%. The fund's features make it a solid option for investors looking to add exposure to the aerospace and defense industry to their portfolio.

U.S. Global Jets ETF

The U.S. Global Jets ETF provides investors with access to the global airline sector. It holds airline stocks and aerospace manufacturers from around the world. The fund had more than 50 holdings as of early 2022, led by the following five: 

The ETF enables people to invest in the entire airline industry. It has a modest ETF expense ratio of 0.6%.

SPDR S&P Aerospace & Defense ETF

The SPDR S&P Aerospace & Defense ETF is another industrial ETF focused on the defense sector. However, it has a narrower focus on the S&P 500 index. It also takes a modified equal-weight approach that provides unconcentrated exposure to the sector. As such, it had 33 holdings as of early 2022, led by the following five:

  • Virgin Galactic (NYSE:SPCE): 4.2% of the fund's holdings
  • Maxar Technologies (NYSE:MAXR): 4.1%
  • Aerojet Rocketdyne (NYSE:AJRD): 3.8%
  • Spirit AeroSystems (NYSE:SPR): 3.7%
  • Huntington Ingalls Industries (NYSE:HII): 3.7%  

The ETF charges a reasonable expense ratio of 0.35% to provide investors with broad exposure to defense stocks within the S&P 500. The fund's features make it ideal for investors who want less-concentrated exposure across the entire defense sector.

Invesco Water Resources

The Invesco Water Resources ETF seeks to track the performance of companies that create products to conserve and purify water for homes, businesses, and industries. The water ETF had 38 holdings as of early 2022, led by the following five:  

The ETF provides focused access to the water sector for a modest expense ratio of 0.5%.

iShares U.S. Transportation ETF

The iShares U.S. Transportation ETF provides investors with exposure to U.S. airlines, railroads, and trucking companies. The ETF had more than 50 holdings as of early 2022, led by the following five:

The fund offers investors the opportunity to invest in a basket of the country's largest transportation companies. It provides access for a relatively modest ETF expense ratio of 0.41%.

Many ways to invest in industrial ETFs

Investors have many ways to use ETFs to invest in the industrial sector. They can own one that offers broad exposure to the entire industry or a more focused approach. Given the options, industrial ETFs can play an important role in an investor's portfolio.

For example, when the economy is in the early stages of recovery, they can invest in a broad-based industrial ETF or one focused on airlines or transportation stocks in hopes of profiting from the subsequent recovery. Meanwhile, they can take a more defensive approach by investing in an ETF focused on defense stocks that tend to be reasonably recession-resistant. They can also consider a water-focused ETF to invest in the thesis that the value of water-related investments will increase in the future.

Given the various roles industrial ETFs can play, they're an important tool for an investor to understand.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends A. O. Smith, Delta Air Lines, Lockheed Martin, MAXAR TECHNOLOGIES LTD, Roper Technologies, Southwest Airlines, Uber Technologies, and Union Pacific. The Motley Fool has a disclosure policy.

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