Chuck Jaffe: One fund, on point for today, the expert to talk about it. This is The ETF of the Week.

Welcome to The ETF of the Week, where we get the latest take from Tom Lydon. He is the Vice Chairman at VettaFi. And here on The ETF of the Week, we examine trending, new and newsworthy, unique, intriguing, exchange traded funds, sometimes things that are just plain different. And Tom, the Vice Chairman at VettaFi, well, he brings it to us and vettafi.com is a great place for you to go to get more information. It’s got a suite of tools that’s going to help make you a better investor in exchange traded funds. Tom Lydon, it is great to chat with you again.

Tom Lydon: Great seeing you, Chuck. Thanks.

Chuck Jaffe: Your ETF of the week is-

Tom Lydon: The Industrial Select Sector SPDR ETF, ticker symbol XLI.

Talking up XLI

Chuck Jaffe: The XLI, the Industrial Select Sector SPDR ETF. Now, I know that this one is trending, Tom. It is above its 200-day moving average basically since we got into June. But that’s a long-term trend. There’s got to be something else that’s making you look at it now.

Tom Lydon: Well, it does have the long-term trend. And it’s been nice and steady as you point out this year, Chuck. But there are a couple other things going on. August has been kind of a rough month for the market. We’ve seen some pullback. We’ve also seen the Fed signal that they may continue to hike interest rates and these additional hikes were somewhat unexpected if we actually do see them happen. Some areas of the market may not like them. The growth area, the technology areas may not.

So two things, Chuck. Number one, there’s stable growth. There are areas where these companies, whether in machinery or defense or infrastructure, there’s steady business that’s built into the pipeline, number one. Number two, the government is spending on infrastructure, and even though there’s some threat of a recession, with a pullback in the economy, they’re not slowing down. They’re still spending the money. So when you look at some of those companies there that are like Raytheon or Honeywell or UPS, companies like Caterpillar, Union Pacific General Electric, these are strong steady companies that continue to, they have to be around, we use them with our infrastructure, and as we continue to build out infrastructure here in the states because we need it, it looks like the prognosis is really good for these stocks when it may be challenging for other sectors.

Chuck Jaffe: That said, this is a fund that’s up like 25% over the last 12 months, whereas over the last 10 years its annualized return has been about half of that, like 12% annualized. Great return, mind you, annualized for a decade. But given that things tend to regress to the mean, are you worried at all that if somebody looks into this now because it’s the ETF of the week and they say, “Okay, I’m curious,” that maybe their expectations will be off? I mean 25% in the last 12 months, more than double what it’s done historically, yes, it’s above the 200-day moving average, but isn’t there a point where something gets above the 200-day moving average, but it’s more likely to go down from there than it is to go up?

Tom Lydon: Well, if you look at the companies and you look at the pipeline that they have, Chuck, everything seems relatively steady. And also, hey, we got an election year coming up. The good news there is if Democrats win, they’re going to continue to spend on infrastructure. If Republicans win, they’re probably going to continue to spend on infrastructure and actually up their game as far as what they’re spending on defense, which is all a part of that area. That’s really, really important. And the other thing is, with certain areas of the market, general sectors that have gone below their averages, and if people follow the trend and took that money off the table, they probably grabbed some pretty good gains, but they’ve also got some dry powder.

Chuck Jaffe: So is the dry powder where your money’s coming from this way? Or is this more concentrate your large cap holdings by going this way? Because the great thing about the industrials is that we absolutely know you’re not buying the Magnificent Seven with this fund, but do you want to go into this sector or do you want to concentrate your large cap in this sector?

Tom Lydon: Well, a lot of people, Chuck, were concerned that they might’ve missed the market run. However, August was a great opportunity as markets pulled back to continue to get into the market. And whether you’re selling something or you just have a lot of money on the sidelines, most investors have a lot of cash right now. And if you’re looking to get in at good price levels and most importantly diversify away from technology, this is a great opportunity.

Chuck Jaffe: Frequently on ETF of the Week, we are talking about funds that are new and different, et cetera. Well, the XLI is about as old school as you get when it comes to ETFs. I mean, we are talking classic kind of original fund. But one of the interesting things is that the way people have used ETFs has changed dramatically. When they first were created, it was, “Oh, here’s something you’re going to lay down. You’re not necessarily going to trade it the way it gets traded now.” When you look at this fund, are you thinking that there’s a different way to use it or is this the classic, “This is your tilt, hold this, play it for the trends,” all the rest?

Tom Lydon: Well, some people are sector investors and the suite of State Street SPDR ETFs for sectors are classic. They were the first there to the marketplace. They’ve got the greatest amount of money. They’ve done a really, really good job. There are other ETF issuers that provide sector opportunities as well. Bottom line is what we try to talk about on ETF of the Week is where are the trends right now? Where are the opportunities that might stick out when others might not be doing well?

I mean, Chuck, before we got on today, I was looking at what sectors were the best performing, what were above their trend lines. I was also looking at countries. You can go in and, like sectors, pick different countries that are actually doing well too. There are countries like Nigeria and Turkey that are up big double digits year to date. And if you’re looking to follow trends, there are so many opportunities that ETFs have to offer. It’s just identifying them, making the right allocation so you’re diversified, and then sticking to the rules.

Chuck Jaffe: Well, the industrial sector, Tom, is no Turkey, also no Nigeria. It’s a lot more mainstream than those things, but interesting to see that it is today the ETF of the week. We’re talking about the XLI, the Industrial Select Sector SPDR, ETF of the week from Tom Lydon at VettaFi. Tom, great stuff. I’ll see you again next week.

Tom Lydon: Thanks Chuck.

Chuck Jaffe: That’s Tom Lydon. He is vice chairman at VettaFi. He’s on Twitter, @TomLydon. VettaFi is on Twitter, @Vetta_Fi, and they are online at vettafi.com. The ETF of the Week is a joint production between VettaFi and Money Life with Chuck Jaffe. And yes, that’s me. You can learn all about my hour long weekday show by going to moneylifeshow.com or by searching wherever you find the good podcasts. The ETF of the Week is here for you every Thursday, and we hope you’ll follow along to make sure you don’t miss a thing. For Tom Lydon, I am Chuck Jaffe. Thanks so much for joining us. We’ll see you again next week. And until we do, Happy Investing, everybody.

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