In an earlier article about popular S&P 500 stocks that you can get via an ETF, I compared United Technologies (NYSE:UTX) with several ETFs, including the Industrial Select Sector SPDR (NYSE:XLI) offered by State Street Global Advisors. Now, I’d like to look at General Electric (NYSE:GE), the busiest stock in the industrial goods sector with 64 million shares trading hands on a daily basis.
Since I’ve already covered the XLI, we’ll look at some other ETFs that have your target stock as one of its top-10 holdings, which you can use as a substitute for investing in GE directly. You’ll reduce your risk and quite possibly, improve your returns.
Of the ETFs focusing on industrials, none with the exception of the XLI has less than 100 stocks in their portfolios. Therefore, I’ll start with the fund with the lowest number of holdings, which is the iShares S&P Global Industrial Sector Index Fund (NYSEARCA:EXI) with 186. GE is its largest holding, with a weighting of 8.02% as of January 17, 2012.
The fund itself has total net assets of $167 million and has been around since September 2006. Its total return on an annual basis over the past five years is -0.37% compared to -9.7% for GE and 0.14% for the S&P 500. The argument can be made in this instance that you’d be better off investing in the iShares S&P 500 Index Fund (NYSE:IVV) (or some other S&P 500 ETF) because this fund’s expense ratio is 0.09% annually compared to 0.48% for the iShares S&P Global Industrial Sector Index Fund.
If fees are a concern, and they should be, a better industrials alternative is the Vanguard Industrials ETF (NYSE:VIS), which charges 0.19% annually, 87% lower than the average expense ratio of funds with similar holdings. GE is the top holding, with a 12.2% weighting as of the end of 2011. This fund is almost three times as popular as the EXI, with total net assets of $449 million, which makes sense given its expense ratio is so much less. Plus, its annual total return over the past 5 years is 1.34% — 171 basis points better than the EXI.
With 369 stocks in its portfolio, you’d think Vanguard Industrials would do worse than the XLI at 186, but that’s not the case. The answer for this discrepancy lies in the indexes followed. While the VIS tracks the performance of the MSCI US Investable Market Industrials 25/50 Index, the EXI replicates the performance of the S&P Global 1200 Industrials Sector Index.
The 25/50 simply restricts ownership in any single stock to more than 25% of a fund’s assets, and second, all stocks with at least a 5% weighting can’t add up to more than 50% of the fund’s assets. Otherwise, it’s an industrials index like any other. The big difference is that the Vanguard ETF is similar in size to the index it tracks and invests in the U.S. only, whereas the iShares fund is about 15% as large as its index and global in content.
If you really like the idea of investing in GE but think the ETF route is the way to go, you can have your cake and eat it, too. The Focus Morningstar Industrials Index ETF (NYSE:FIL) tracks the investment returns of the Morningstar Industrials Index, which is a subset of the Morningstar US Market Index. The index and fund both have 254 holdings, with GE the biggest at an 11.61% weighting. The next biggest holding is United Technologies at 3.57%, which means GE is one-tenth of the fund’s assets while the other 253 stocks make up the remaining 88.4%.
It’s rare to see an 800 basis-point spread between the top holding in a fund and the second-highest. While the fund itself is less than a year old, the five-year annual return of the index as of the end of December, was 0.74%. As of January 19, FIL is up 6.94% year-to-date. The best part — its expense ratio is 0.19%. That’s reasonable indeed.
So, here are three alternatives to investing directly in GE. Before you make a decision, you might also consider the Industrial Select Sector SPDR mentioned above, which has just 61 stocks, a 0.20% expense ratio and a good five-year return.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.