Companies like General Electric and Air Canada are part of the industrial sector. But these stocks are linked to politics and the economy, so they can be volatile. Weigh the benefits and drawbacks to find out if they might be a good fit for your investment portfolio.
What are industrial stocks?
The industrial sector is one of 11 sectors of the stock market that include companies that produce goods for industrial and commercial use, such as in construction or manufacturing.
These businesses play a critical role in the economy by supporting other industries. They supply the industrial tools, machinery and equipment that are used to produce consumer goods and services.
What industries are included in this sector?
Industrial stocks cover many different industries. A few popular subsectors include:
Aerospace and defense. Companies that manufacture civil or military aircraft and defense products.
Construction and engineering. Those involved in the nonresidential building industry.
Electrical equipment. Producers of electrical components and equipment.
Machinery industry. These companies manufacture and sell industrial equipment and machinery to other companies, such as tractors for agricultural use.
Transportation infrastructure. This industry covers airport operations and companies that manage roads, tunnels, rail tracks and marine ports.
How to invest in the industrial sector
Invest in the industrial sector by purchasing individual stocks or exchange-traded funds (ETFs). By choosing your own stocks, you buy shares of a company and ultimately have more control over your investments. That comes with its fair share of risk. You can also choose the ETF route, which gives you a basket of industrial stocks to help minimize exposure.
A brief rundown of how to start investing:
Find a brokerage. Explore different brokerage platforms and choose a firm that fits your financial needs.
Apply for an account. You can open most brokerage accounts online. You’ll need to fund your account before you buy any stocks or ETFs.
Pick your securities. Your platform should come with research tools to help you learn about the right stocks and ETFs for you.
Place an order. When you’re ready, buy the security.
Monitor your investments. Use your brokerage account to track your securities.
What stocks are in the industrial goods sector?
Industrial stocks are sold by both domestic and international companies that make all sorts of machines, equipment and facilities for use by commercial enterprises. Take some time to research each company, its history and its financials before you buy in.
Canadian National Railway Company (TSX: CNR)
Canadian Pacific Railway Limited (TSX: CP.TO)
Waste Connections Inc. (TSX: WCN.TO)
WSP Global Inc. (TSX: WSP)
Toromont Industries Ltd. (TSX: TIH)
Ritchie Bros. Auctioneers Incorporated (TSX: RBA)
Ag Growth International Inc. (TSX: AFN)
K-Bro Linen Inc. (TSX: KBL)
GDI Integrated Facility Services Inc. (TSX: GDI)
Morneau Shepell Inc. (TSX: MSI)
What ETFs track the industrial sector?
Several popular ETFs that track the industrial sector are:
BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (TSX: ZWA.TO)
BMO Dow Jones Industrial Average Hedged to CAD Index ETF (TSX: ZDJ.TO)
BMO Equal Weight Industrials Index ETF (TSX: ZIN.TO)
iShares S&P Global Industrials Index ETF CAD-Hedged (TSX: XGI.TO)
FT AlphaDEX U.S. Industrials Sector Index ETF (TSX: FHG.TO)
Vanguard Industrials Index Fund ETF Shares (NYSEARCA: VIS)
SPDR S&P Aerospace and Defense ETF (NYSEARCA: XAR)
SPDR S&P Transportation ETF (NYSEARCA: XTN)
You can invest in industrial ETFs from Canada, but if you’re looking for more options, you can also explore ETFs that trade on stock exchanges in other countries like the NYSE in the US. There are several Canadian-based brokerages that offer access to international exchanges on which industrial ETFs trade including Interactive Brokers and Questrade.
How is the industrial sector performing?
The graph below tracks the performance of the Industrial Select Sector SPDR ETF (XLI) in the US. Tracking ETF performance is one way to gauge how the sector as a whole is doing.
Why invest in the industrial sector?
Industrial stocks are susceptible to economic cycles. When the economy is doing well, the industrial sector thrives and may even outperform the market. For example, as the US recovered from the Great Recession in 2009, the S&P 500 Index returned 15.1% in 2010, compared to the S&P 500 industrial Index of 26.7%.
The industrial sector can also see a boost when the economy is just coming out of a recession. Economic growth and a rise in employment and profits can promote business confidence and outlook. That could mean new building projects and machinery purchases.
What unique risks does the industrial sector face?
The industrial sector is deeply connected to the global economy and the international political climate. Some risks that are unique to industrial stocks include:
Tariffs. In the midst of geopolitical unrest and trade wars, tariffs push the cost of goods up. Higher prices hurt consumers and can lead to fewer sales and cuts in production — slowing the sector down.
Low demand. During a weak economy, the need for industrial goods and services also declines. Less demand can directly impact industrial stocks’ profit and performance.
Global economy. Investors also need to watch the economies of key countries, like China. For example, a number of US companies with a presence in Canada, like General Motors (GM) and 3M (MMM), have significant ties to China. A slowdown abroad can affect a large portion of these industrial stocks.
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Bottom line
The industrial sector could be a good option if you’ve got a pulse on global politics and have a strong understanding of the economic cycle, but there are unique risks to consider. When you’re ready to start investing, be sure to find the right online brokerage platform for your financial goals.
Frequently asked questions
Yes. Industrial stocks tend to do well when the economy is strong and nosedive when the economy is weak.
No, the industrial sector generally has below-average dividend yields when compared to the rest of the market. For example, in June, 2020, the Invesco S&P 500 Equal Weight industrial ETF (RGI) has a 1.55% dividend yield versus the S&P 500 Index’s 1.96%. But, remember, this can change with fluctuations in the economy. As of November 30, 2020, the BMO Equal Weight Industrials Index ETF has a 3.16% dividend yield versus the BMO Balanced ETF’s 2.65%.
No. The industrial sector has its hand in several different industry cookie jars. Each industry performs differently during an economic decline. For instance, in the Great Recession of 2008, construction took a harder hit than trucking services.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Kimberly Ellis is a personal finance writer at Finder, specializing in banking and financial literacy. After teaching in public and private schools, Kimberly zeroed in on personal financial education to help families and kids develop lifelong money skills. She hails from New York City, graduating summa cum laude from Queens College with a BA in elementary education and mathematics, as well as a New York State teaching certificate. She’s also an aspiring polyglot, always in a book and forever on the hunt for the perfect classic red lipstick.
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