This ETF Will Deliver Upside With Downside Protection

By Casey Murphy | May 16, 2014 AAA

With markets trading near all-time highs and naysayers warning of a coming correction, many investors and traders are asking how they can both stick around for any more gains and still limit their downside risk.

The answer could be the group of stocks known as industrials. For those who don’t know, the industrial goods sector is made up of companies that focus on aerospace, defense, industrial machinery, lumber, construction, metal fabrication and cement. Strategic investors often increase exposure to industrials during periods of global expansion, as they tend to outperform most other market segments. Industrial stocks also tend to pay higher-than-average dividends, so there's also a defensive element. If you need a quick refresher on this topic, check out The Case For The Industrial Sector.

An ETF With Broad Industrial Exposure

This week we’ll take a look at the iShares Global Industrials ETF (NYSE Arca:EXI), which is a popular vehicle for gaining exposure to a wide swath of industrials. Since early May 2013, EXI has gained an impressive 20.26%. As you can see from the chart below, an investment in global industrials has significantly outperformed broad-market indexes, such as the Dow Jones Industrial Average and the S&P 500.

Looking at the chart of EXI below, you’ll notice that it has been in a very strong uptrend over the past three years. See how the combinations of the long-term ascending trendline and the 200-day moving average (red line) have propped up the price each time the bears have tried to send the price lower. Long-term traders will use these levels as guides when creating their stop-loss orders. The relatively tight gap between the trendline and the current price suggests that current levels are an interesting entry level for those looking to enter into a long position.  

Top Holdings and Key Stats of EXI

The EXI ETF was created by iShares to track the investment results of an index composed of global equities in the industrials sector. As of May 9, 2014, the fund has total net assets of $315 million and held 194 stocks. The fund carries a reasonable management fee of 0.48%, which makes this an inexpensive alternative to customizing a portfolio with a focus on global industrials. For those who are more inclined, a good place to start when looking to increase exposure may be to analyze the top holdings of EXI. They include General Electric Co. (NYSE:GE), Siemens AG (NYSE:SI), United Technologies Corp. (NYSE:UTX), The Boeing Co. (NYSE:BA) and 3M Co. (NYSE:MMM).

Taking a look at the five year chart of GE, which comprises 7.50% of the ETF, it's little wonder why the fund has experienced such strong growth. Other ETF component stocks display a similarly strong uptrend. Based on the charts, there are very few technical sell signals that would suggest that the trends will reverse anytime soon. 

The Bottom Line

Investments in the industrials sector through products such as the iShares Global Industrial ETF may continue to reward investors as economic expansion continues. Funds such as EXI also provide holders with a layer of dividend income and capital protection that are not easily found in other market segments.

At the time of writing, Casey Murphy did not own shares of any company mentioned in this article.

 

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