EXI: Industrials Dashboard For August

A top-down analysis of the industrial sector, using proprietary valuation, quality, and momentum metrics, indicates the sector is broadly overpriced, with the transportation industry being a notable exception, undervalued by 10% relative to its 11-year average. The iShares Global Industrials ETF (EXI) is presented as a globally diversified alternative to the U.S.-focused Industrial Select Sector SPDR Fund ETF (XLI), offering lower portfolio concentration and turnover. Despite EXI's historical annualized underperformance of approximately two percentage points against XLI, largely attributed to currency appreciation, its high correlation suggests it remains a viable option for investors seeking international industrial exposure and diversification.

Analysis

Based on a top-down analysis using value, quality, and momentum metrics, the industrial sector is broadly characterized as overpriced relative to its 11-year historical averages. Most subsectors exhibit overvaluation ranging from 22% to 39%, with aerospace and defense identified as the most extended group. A notable exception is the transportation industry, which appears undervalued by approximately 10% against its baseline. The analysis also highlights that some overvaluation, such as in the building and equipment industry, may be partially justified by strong underlying quality scores. When considering investment vehicles, the iShares Global Industrials ETF (EXI) is positioned as a diversified, global alternative to the US-focused Industrial Select Sector SPDR Fund (XLI). EXI offers significantly lower portfolio concentration, with its top ten holdings comprising 21.8% of assets versus 38.2% for XLI. However, EXI has historically underperformed XLI by about two percentage points annually, a gap largely attributed to currency headwinds from a 35% appreciation in the U.S. dollar since 2008.

Key Decisions for Investors

• Investors should exercise caution and selectivity within the industrial sector due to widespread overvaluation, potentially underweighting the most overvalued segments like aerospace and defense.
• For those seeking value, the transportation subsector warrants further investigation as it is the only group identified as being undervalued relative to its historical norms.
• The choice between XLI and EXI depends on strategic goals; EXI is suitable for investors seeking international diversification and reduced single-stock risk, but they must be willing to accept potential underperformance due to currency fluctuations.
• A portfolio view anticipating a weaker U.S. dollar could favor a position in EXI over XLI, as a reversal in currency trends would likely close the historical performance gap.