Examples of companies in this sector: Boeing, Lockheed Martin, Danaher, 3M, General Electric, Caterpillar.
The most popular sector ETFs: Industrial Select Sector SPDR (XLI), Vanguard Industrials ETF (VIS), iShares Transportation Average ETF (IYT).
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Companies in the sector provide industrial products and services. The sector is closely related to the commodities sector, but there is a difference between the two: first, industrial sector products are not commodities. Second, in the industrial sector a large number of companies provide services, while in the commodities sector the products are concentrated.
The industrial sector is divided into fourteen industries, which form three large industry groups.
Capital Goods, capital goods, that is, those that are not sold to final consumers but are involved in the production of other products. These are defense, industrial and agricultural equipment, engineering, civil engineering, and trade services. This includes the following industries:
Aerospace and defense: civil and military aircraft, defense electronics, radar, space instruments.
Construction products and equipment: fiberglass, ventilation systems, doors – except lumber, cement, and other materials that fall into the raw materials sector.
Construction and engineering: non-residential structures, bridges, etc. This does not include developers of residential buildings, they fall under Consumer Discretionary.
Electrical equipment: turbines, generators, cables, wires.
Industrial Conglomerates: companies with operations in three or more industries.
Heavy machinery: agricultural, industrial, presses, elevators, machine tools.
Trading companies and distributors.
Commercial and professional services. Two industries here:
Commercial Services. Members of this industry provide office, printing, security, and catering, cleaning, and garbage services to other companies. In other words, these are B2B service providers – business to business.
Recruiting agencies, consulting and research for business.
Carriers, which includes the following industries:
Air cargo and logistics.
Passenger Airlines.
Water transportation – freight and passenger. This does not include cruise companies.
Land and rail transport.
Transport infrastructure: companies operating airports and marine terminals, roads, bridges, tunnels, etc.
The industrial sector is economically sensitive and performs best in the early phase of the business cycle, when the pace of industrial production is increasing, while in the recessionary phase it becomes an outsider on a par with Real Estate and IT. The exception could be the defense industry, where budgets and orders are prepared several years in advance.
Utilities, utilities
Examples of companies in this sector: NextEra Energy, Dominion, Duke Energy, Exelon Corp, National Grid, Sempra Energy.
The most popular sector ETFs are Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF (VPU), iShares Global Infrastructure ETF (IGF).
These include five sectors:
Power industry. Companies that generate and distribute electricity, including nuclear power plants. Because of their strategic importance, these companies are often heavily regulated and have a large government stake.
Gas suppliers. This does not include companies engaged in exploration and production: this is the prerogative of the oil and gas sector.
Water power, water supply for domestic and commercial use. Includes sewage treatment plants. Water is a natural monopoly, so water utilities are usually under municipal management.
Diversified energy: multi-service companies offering a wide range of utilities. These are often holding companies that own a number of subsidiaries.
Renewable energy. These companies produce and distribute electricity from renewable sources, such as solar, geothermal, and wind power. This does not include manufacturers of solar panels and technology cells, they are part of the IT sector.
The sector is considered defensive because utility companies have stable earnings throughout the business cycle. Stocks are generally not volatile, and companies pay good dividends. Also, the renewable energy industry is very promising.
The utilities sector performs well in times of crisis, but during the run-up to the economy, early in the cycle, it usually loses popularity, because investors prefer more aggressive and growing assets.
Big debts. Utilities typically have deployed and expensive infrastructure, and because of it, a lot of debt on their balance sheets. This makes companies in the sector particularly sensitive to rising interest rates: if loans become more expensive, it leads to higher operating costs.
Such organizations require competent management. Since they need a constant flow of funds for modernization and capital expenditures, they often resort to loans and bond placements. Too much stress can ruin a company’s credit rating, making it difficult to get new loans.
Companies operate on long-term, fixed-rate power purchase agreements. If production costs rise, companies continue to sell utilities at the negotiated rate, reducing their margins.
The companies are subject to careful oversight and cannot easily raise rates by increasing profits. They have to operate within a tightly regulated framework.