Investing in Industrial ETFs

The industrial sector is vital to the global economy. Companies in the sector manufacture and distribute building products and machinery, provide commercial and professional services, and offer 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, as well as those that provide waste management, which are relatively recession-proof. Investors shouldn't completely dismiss all industrial stocks when concerns about a recession arise.

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.

Top industrial ETFs

Seven top industrial ETFs in 2024

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

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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 (AUM) 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 around 75 stocks as of late 2024. The ETF's top five industries within the industrial sector were: 

• Aerospace and Defense: 21.8 %of the fund's holdings
• Machinery: 20.1%
• Ground Transportation: 10.1%
• Electrical Equipment: 7.8%
• Commercial Services and Supply: 6.8%

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 0.09%. These 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 late 2024, the ETF held around 385 industrial stocks. The fund's top five industries within the industrial sector were:

• Aerospace and Defense: 18.9% of the fund's holdings
• Industrial Machinery: 10.2%
• Building Products: 7.5%
• Electrical Components and Equipment: 7.5%
• Construction Machinery and Heavy Transport: 6.6%

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 late 2024, led by the following five industrial stocks: 

• GE Aerospace (GE 2.17%): 17.9% of the fund's holdings.
• RTX (RTX 0.88%): 14.4%
• Lockheed Martin (LMT 1.95%): 9.4%
• Axon Enterprise (AXON 2.6%): 7.6%
• Howmet Aerospace (HWM 1.35%): 5.2%

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 0.4%. The fund's features make it a solid option for investors looking to add exposure to the aerospace and defense industry to their portfolio.

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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 late 2024, led by the following five: 

• United Airlines (UAL 1.93%): 15.2% of the fund's holdings
• Delta Air Lines (DAL 0.91%): 11.1%
• American Airlines (AAL 1.44%): 10.4%
• Southwest Airlines (LUV 1.52%): 8.7%
• Allegiant Travel (ALGT 2.86%): 4.6%

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 late 2024, led by the following five:

• Axon Enterprise: 7.3% of the fund's holdings.
• Rocket Lab (RKLB 7.11%): 6.9%
• Howmet Aerospace: 5.2%
• Curtiss-Wright (CW 0.79%): 5%
• Woodward (WWD 0.33%): 4.6%.

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 40 holdings as of late 2024, led by the following five:  

• Ferguson Enterprises (FERG 2.44%): 8.3% of the fund's holdings
• Roper Technologies (ROP 0.7%): 7.9%
• Ecolab (ECL 1.17%): 7.6%
• Xylem (XYL 0.61%): 6.2%
• Veralto (VLTO 2.88%): 6%

The ETF provides focused access to the water sector for a modest expense ratio of 0.59%.

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 almost 45 holdings as of late 2024, led by the following five:

• Uber Technologies (UBER 0.86%): 16.3% of the fund's holdings
• Union Pacific (UNP 1.42%): 15.8%
• United Parcel Service (UPS 2.47%): 7.9%
• Delta Air Lines: 5.7%
• United Airlines: 5.1%

The fund offers investors the opportunity to invest in a basket of the country's largest transportation companies. It provides access with a relatively modest ETF expense ratio of 0.39%.

Related investing topics

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 recovering from a recession, 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.

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