How Thematic ETFs Differ From Sector Funds

Industrials securities are unloved by financial advisors. However, it is the backbone of a relatively popular sector ETF and two relatively new thematic ETFs positioned to benefit from transformational changes. Perhaps they want to dive deeper into the fundamentals with us during the VettaFi Equity Symposium on September 21.

This week, VettaFi hosted a webcast with State Street Global Advisors with advisors. We asked, “Which sector do you find most attractive to invest in for the rest of 2023?” The most popular selections were energy (44%) and information technology (23%). Healthcare (18%) and financials (9.7%) also garnered some support. The least popular of those listed was industrials, with 5.8% of the vote.

The Industrials Select Sector SPDR (XLI) is the biggest industrials sector ETF, with $15 billion. The ETF has pulled in $1.1 billion of new money in the last six months and was up 7.4% year to date. XLI is market-cap-weighted and owns the stocks within the S&P 500 Index like Boeing, Caterpillar, Deere, General Electric, and Honeywell.

Thematic ETFs Favoring Industrials

Two thematic ETFs that launched in 2023 also have most of their assets in the industrials sector, but what’s inside and why is very different than XLI.

The Engine No.1 Transform Supply Chain ETF (SUPP) began trading in February 2023. It is a concentrated, actively managed thematic ETF. Engine No 1 believes there is a once-in-a-generation shift underway. The fund focuses on businesses transforming and that have “relocalized” their supply chains, plants jobs, and other parts of their operations.

SUPP recently had 61% of its assets in industrial stocks. While there’s some overlap with XLI, positions like Waste Management (8.0% of SUPP, 1.9% of XLI) and CSX Corporation (6.6%, 2.0%) are favored by Engine No. 1. However, SUPP does not own any of the 10 largest positions in XLI. Instead, the ETF has meaningful stakes in information technology (23%) and materials (13%) through companies like Lam Research, Martin Marietta Materials, and Nvidia.