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Dec 31, 2019

Industrials ETF gets cash infusion as recession worries subside

The engine of a Boeing Co. 737 Max 9 jetliner is seen at the company's manufacturing facility in Renton, Washington, U.S.

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Investors are placing big bets on the world’s largest exchange-traded fund tracking industrial stocks as fears of a looming U.S. recession fade with the New Year approaching.

The US$10 billion Industrial Select Sector SPDR Fund, ticker XLI, took in US$708 million last week, the most since January. Shares of the ETF have also gained, rising more than 5.5 per cent since Dec. 24.

“XLI provides large cap industrial exposure with a heavy weight in aerospace and defense as well as machinery companies,” said Todd Rosenbluth, director of ETF research at CFRA Research. “These are economically sensitive and are in demand when investors have confidence that there will not be a U.S. recession.”

Investors are looking for signs that the U.S. economy remains strong. It expanded by 3.5 per cent in the third quarter and is expected to grow next year, albeit at a slower pace. Some retailers are posting record holiday sales, and consumption -- which accounts for around 70 per cent of the economy -- rose more than forecast in November. A Federal Reserve Bank of New York gauge puts chances of a recession a year from now at around 16 percent, with some investors calling fears of a slowdown “overblown.”

Industrials have been under pressure for much of 2019 amid fears of cooling global growth and increased worries about trade disputes hurting multinationals. Shares of XLI are down around 16 per cent for the year. But some of its largest holdings have rebounded recently. Boeing Co., its biggest holding, has climbed more than 8 per cent since Dec. 24, and 3M Co. has increased around 6 percent over the same period.

“It looks like bottom-calling for this sector,” said Eric Balchunas, a Bloomberg Intelligence ETF analyst. “It’s in an interesting spot. It’s straight defensive,” he said, and is “used more by people making shifts based on sentiment.”