This series of monthly articles features a dashboard with aggregate measures of subsectors across industries. It is also a review of sector ETFs such as the Industrial Select Sector ETF SPDR (XLI) and the Vanguard Industrials ETF (NYSEARCA:VIS), whose largest holdings are used to calculate these parameters.

Shortcut

The next two paragraphs in italics describe the dashboard methodology. They are necessary for new readers to understand metrics. If you are used to these series or if you are short on time, you can skip them and go to the leaderboards.

Basic Metrics

I calculate the median value of five fundamental ratios for each subsector: Return on Earnings (“EY”), Return on Sales (“SY”), Return on Free Cash Flow (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the US stock market. The five basic measures are calculated over the last 12 months. For everyone, the higher, the better. EY, SY and FY are the medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price/something ratios, which are unusable or unavailable when the “something” is close to zero or negative (e.g. companies with negative earnings). I also look at two momentum indicators for each group: median monthly return (RetM) and median annual return (RetY).

I prefer medians to means because a median divides a set into a good half and a bad half. A capital-weighted average is skewed by extreme values ​​and larger companies. My metrics are designed for stock picking rather than index investing.

Value and quality scores

I calculate historical baselines for all metrics. They are denoted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as averages over a retrospective period of 11 years. For example, the value of EYh for transportation in the table below is the 11-year average of the median earnings yield in transportation companies. The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). Similarly, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

Scores are in percentage points. VS can be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation should be taken with caution: the baseline is an arbitrary reference and not an assumed fair value. The formula assumes that the three evaluation measures are equally important.

Current data

The following table shows last week’s closing metrics and scores. The columns represent all the data named and defined above.

* Hood for convenience

Value and quality Chart

The following chart plots the value and quality scores by subsector (higher is better).

Evolution since last month

Value ratings are down across all subsectors, especially in transportation and machinery/conglomerates.

Momentum

The following chart plots momentum data.

Interpretation

Transportation is the only subsector that is undervalued compared to 11-year averages and its quality is close to the historical benchmark. Services/distribution are overrated by around 25%, but a good quality score can partly justify this. Building and construction equipment has the lowest value score in the industry. The quality score is good, but not high enough to justify such an overrating. Aerospace/Defense doesn’t look attractive either: Value and Quality scores are significantly below the baseline.

Focus on VIS

The Vanguard Industrials ETF has tracked the MSCI US IMI Consumer Industrials 25/50 Index since 09/23/2004. It has a total spend rate of 0.10%, which is a bit more expensive than its closest competitor FIDU (0.08%) and a bit cheaper than XLI (0.12%).

At the time of writing, the fund has 366 holdings. The following table shows the top 10 names with some fundamental ratios. Their overall weight is 30.9%.

The heaviest industries in the fund are machinery (19.5%), aerospace/defense (18.3%) and transportation (18.1%). VIS has significantly more holdings than XLI (366 large-small caps versus 75 large-mid caps). However, their annualized returns and risk measures since VIS’s inception are nearly identical:

Data calculated with Portfolio123

In summary, VIS is a good product with cheap management fees for investors looking for capital-weighted exposure in industrials. No stock weighs more than 4.3% of asset value, so individual stock risks are moderate. However, investors who want a less concentrated portfolio may prefer the Invesco S&P 500® Equal Weight Industrials (RGI) ETF, whose largest holding weighs around 1.6%. VIS or XLI are equivalents for buy-and-hold investors. However, XLI has much higher liquidity, making it a better choice for trading and tactical allocation.

Dashboard list

I use the first table to calculate the value and quality scores. It can also be used in a stock selection process to check the standing of companies against their peers. For example, the EY column tells us that a transportation company with an earnings yield greater than 0.0523 (or price/earnings less than 19.12 is in the better half of the subsector for that A dashboard list is sent monthly to Quantitative Risk & Value subscribers, with the most profitable companies ranking in the top half among their peers on all three valuation metrics at the same time. below was sent to subscribers several weeks ago based on data available at the time.

This is a rolling list with a statistical bias toward long-term excess returns, not the result of an analysis of each stock.