VIS: A Better Real Play On Growth Than Technology

What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. - Carl Menger

It's hard to feel confident in cyclical parts of the marketplace when credit risks rise and as concerns mount over a recession. But just because one is negative on global growth doesn't mean one should totally avoid exposure to areas that benefit from it. To that end, let's focus on the Vanguard Industrials Index Fund ETF Shares (NYSEARCA:VIS) as a sector fund that plays off the real economy.

VIS seeks to emulate the performance of the MSCI US Investable Market Industrials 25/50 Index. It adopts a passive management strategy and maintains full replication where feasible. In cases where regulatory constraints inhibit full replication, the fund employs a sampling strategy to approximate the index's main characteristics. The fund remains fully invested at all times, and its low expenses foster minimal net tracking error.

The industrials sector is made up of companies engaged in a variety of activities, including the manufacture and distribution of capital goods, as well as the provision of commercial services and supplies, and transportation services. These are companies that deal with real goods and services, and as such are very much tied to domestic and international growth and activity.

From a relative perspective, I favor Industrials over Technology here. Looking at the ratio of VIS relative to the Technology Select Sector SPDR ETF (XLK), we can see that Industrials have actually outperformed Tech (despite AI mania) since the end of May. And while the short-term relative strength is unclear, this does look like one massive base.

On the expense side, VIS offers a competitive expense ratio of 0.10%, significantly lower than the average expense ratio of 1.07% for industrials funds and 0.49% for industrials funds that are ETFs only. This lower expense ratio potentially translates into higher returns for investors.

Top Holdings and Diversification

VIS boasts a diversified portfolio, with the top ten holdings accounting for only 28% of the total net assets. Key holdings include Honeywell International Inc., United Parcel Service Inc., Caterpillar Inc., and Union Pacific Corp.

The fund's diversification extends to various sub-industries within the industrials sector. Aerospace & Defense, Industrial Machinery & Supplies & Components, and Electrical Components & Equipment are among the top sub-industries represented in the fund.

VIS includes large-cap, medium-cap, and small-cap companies. Large-cap companies constitute the majority of the fund, accounting for 45% of the portfolio.

Peer Comparison

There are plenty of other Industrials funds out there, with large ones competing in the space, like the Industrial Select Sector SPDR® Fund ETF (XLI) and the Fidelity® MSCI Industrials Index ETF (FIDU). XLI has the same expense ratio of 0.1% and FIDU is at 0.08%. I don't see any major differences among the three, so it's more a function of personal preference.

Conclusion

Investing in VIS provides exposure to a broad spectrum of companies in the industrials sector. However, potential macroeconomic headwinds make it crucial for investors to monitor market conditions closely. Despite these challenges, VIS's solid track record, competitive expense ratio, and diversified portfolio make it a compelling option for those looking to invest in the industrials sector. Vanguard Industrials Index Fund ETF Shares is a strong fund, and if we don't enter a recession (which is certainly possible), I'd favor this over Tech over a longer time frame.

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