SMSFundamentals | Mar 09 2012
By JP Goldman, Switzer Super Report
The Australian economy is often now described as travelling at ‘two speeds’. In the fast lane is the booming mining sector; in the slow lane are the non-mining sectors, such as retailing, manufacturing and housing construction.
One would think given this outlook that the lead sector of the Australian share market would be the resources sector, and companies wallowing in such a seemingly trade exposed sector as ‘industrials’ would be doing it tough.
But the reality is far different.
Industrials take off
Since the overall S&P/ASX200 index bottomed in early October, industrials have been the strongest performing sector in the rebound. In the five months ending February, the industrials sector has lifted by a whopping 19.9% compared with a gain of only 7.2% in the overall market. The materials sector – which includes most of Australia’s major mining companies – has only lifted by 5.7% over this period.
S&P/ASX200 Industrials vs. 30-day moving average
Relative price ratio to S&P/ASX200 index
Why is this so? Turns out that the mining boom is an important reason, as it’s now benefiting sectors that might not at first glance seem obvious to many investors.
Not all industrials are strong
Of course, the industrials sector does include some transport and manufacturing firms that find themselves on the wrong side of the mining boom. But it also includes most of Australia’s major engineering and construction firms that are enjoying good business due to the ramping up in mining exploration and development.
According to the Australian Bureau of Statistic’s latest capital expenditure survey, the value of mining investment is expected to rise by over 70% this financial year, and by a further 60% next financial year.
Mining services strength
It’s no surprise, therefore, that six of the top 10 performing industrial sector stocks over the past six month are engineering and construction firms, including NRW Holdings ((NWH)), Leighton Holdings ((LEI)), Macmahon Holdings ((MAH)), and Boart Longyear ((BLY)).
Another industrial firm benefiting from the mining boom – though this time in the transportation sub sector – is QR National ((QRN)).
Of course, with a lot of due diligence, investors could probably pick a few stocks in the industrials sector in order to gain exposure to this engineering and construction boom. But there’s an even easier and perhaps less riskier way for those simply seeking broad exposure to the sector – through an exchange-traded fund, or ETF.
An Industrials ETF
ETF provider Australian Indexed Investments currently has six sector-based ETFs trading on the ASX, one of which (IDD) tracks the S&P/ASX200 industrial sector. The annual management fee is 0.43%, and in exchange investors can gain broad exposure to the sector by holding only one investment.
IDD Top Stock Holdings
Source: Australian Indexed Investments
At this stage, however, this is still a relatively new ETF and is not that actively traded. Last month, only $1.6 million in funds under management and an average daily bid-offer spread of 0.71% according to ASX’s monthly ETF report.
The bottom line
That said, IDD is still a good way to seek broad exposure to the sector, provided investors buy carefully – such as, for example, using limit orders rather than market orders, and haggling for better prices when volumes seem small and/or the best bid and offer spreads seem too wide (read more about how to trade ETFs during times of low liquidity).
Due to the ASX requirement of active market making in ETFs, investors should always find modest quantities of this ETF for sale or purchase on the market at around the net-asset-value of the underlying stocks that it holds. And as market makers can generate new ETFs as needed, they will always make more supply available at prices near the net asset value (NAV) as long as there is demand.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
