‘Curious’ outflows from broad industrial ETFs seen as ‘contrarian bullish’ as aerospace and defense funds attract investors

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Hi! This week’s ETF wrap digs into the industrials sector, which recently has seen outflows despite demand for funds in aerospace and defense. Todd Sohn, an ETF strategist at Strategas, finds the broad outflows “curious” and is surprised by the lack of machinery ETFs.

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Investors have been snubbing exchange-traded funds broadly focused on the industrial sector, but it’s an area of the stock market that recently has done relatively well on an equal-weighted measure as well as in certain pockets, according to research from Strategas. 

It’s “curious” and “contrarian bullish” that broad industrial ETFs have seen outflows, said Todd Sohn, an ETF strategist at Strategas, in a note dated Feb. 21. Industrials have been “quietly strong,” Sohn said by phone, “but you’re not seeing money chase there.” 

The Invesco S&P 500 Equal Weight Industrials ETF has gained 5.4% this year through Wednesday, surpassing the S&P 500 index’s 4% rise, FactSet data show. The First Trust RBA American Industrial Renaissance ETF which invests in small and midcap companies, soared 10.3% over the same period. 

The industrial sector broadly includes companies in machinery, aerospace and defense, and transportation and logistics, according to Sohn. “The majority of money is going to defense ETFs” like the iShares U.S. Aerospace & Defense ETF and Invesco Aerospace & Defense ETF he said by phone, with holdings such as Raytheon Technologies Corp. Lockheed Martin Corp. and Boeing Co.

With geopolitical risks highlighted by the Chinese spy balloon and Russia’s war with Ukraine, “it makes sense that folks might want exposure to companies that are involved with making missiles and defending” the U.S., said Sohn. Indexx, which creates indexes for firms that provide ETFs, has seen recent demand around aerospace and defense, according to its president and co-chief executive officer Rahul Sen Sharma. For example, he said the First Trust Indxx Aerospace & Defense ETF launched in October.

Still, considering the “strong” performance of machinery stocks, it’s “surprising” the majority of capital flowing into industrial-sector ETFs over the past 65 days has gone to funds investing in aerospace and defense, according to the Strategas report. Beyond the small- and midcap focused First Trust RBA American Industrial Renaissance ETF, there are no machinery based ETFs, the report says.

No machinery ETFs?

In the Strategas note, Sohn says that ETF investors otherwise seeking deeper exposure to machinery stocks “have to go more thematic” with funds such as the VanEck Agribusiness ETF or iShares MSCI Agriculture Producers ETF Machinery stocks include construction equipment maker Caterpillar Inc. agriculture equipment manufacturer Deere & Co. elevator maker Otis Worldwide Corp. and Parker-Hannifin Corp. according to Sohn. 

Shares of Parker-Hannifin, a maker of motion and control technologies and systems, have surged 18.7% this year through Wednesday, FactSet data show.

“There’s no machinery ETFs, which I find kind of surprising because it’s a big category,” Sohn said by phone. 

Meanwhile, transportation and logistics ETFs broadly saw outflows of about $627 million in the 65 trading days through Feb. 17, compared with $1.18 billion of inflows into aerospace and defense and $77 million of outflows for broad industrial ETFs, according to Sohn. 

Within the transportation and logistics category, the iShares U.S. Transportation ETF has gained around 6% this year through Wednesday, while the U.S. Global Jets ETF soared 13% over the same period, FactSet data show. 

Read: ‘Closer to local design and demand’: Engine No. 1 launches Transform Supply Chain ETF in wake of COVID disruptions

The industrial sector has broadly seen gains over the past year. 

For example, the Industrial Select Sector SPDR Fund which tracks a market-capitalization weighted index of stocks in the S&P 500’s industrial sector, is up around 5.6% over the past 12 months, according to FactSet data, at last check. The Invesco S&P 500 Equal Weight Industrials ETF has risen around 7.7% over the same period, while the SPDR S&P 500 ETF Trust is down around 5% over the past 12 months.

Other exchange-traded funds focused on the sector include the Vanguard Industrials ETF the First Trust Industrials/Producer Durables AlphaDEX Fund and the iShares U.S. Industrials ETF said Sohn.

As for the recent gains seen in industrial ETFs, he said “it might be a message that the economy is still in pretty good shape, that a recession is not imminent.”

Meanwhile, the iShares U.S. Aerospace & Defense ETF has jumped 14.2% over the past 12 months, while the Invesco Aerospace & Defense ETF has climbed 16%, FactSet data show, at last check.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers %Performance
abrdn Physical Platinum Shares ETF 3.4
Invesco DB Agriculture Fund 1.4
Quadratic Interest Rate Volatility & Inflation Hedge ETF 1.2
First Trust Nasdaq Food & Beverage ETF 1.1
iShares MSCI Mexico ETF 0.7
Source: FactSet data through Wednesday, Feb. 22, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater

…and the bad

Bottom Performers %Performance
United States Natural Gas Fund LP -10.0
SPDR S&P Oil & Gas Equipment & Services ETF -9.6
Sprott Uranium Miners ETF -9.2
VanEck Oil Services ETF -8.7
First Trust Nasdaq Clean Edge Green Energy Index Fund -8.6
Source: FactSet data

New ETFs

Global X ETFs announced on Feb. 22 the launch of the Global X S&P 500 ESG Covered Call ETF and the Global X Nasdaq-100 ESG Covered Call ETF The new funds consider environmental, social, governance criteria while aiming to increase potential income through a covered call strategy that involves selling call options, according to the announcement. 

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