Vanguard Industrials Index Fund: March Industry Dashboard (NYSEARCA:VIS)

This series of monthly articles presents 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 transport in the table below is the 11-year average of the median earnings yield in transport businesses.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.

	VS	QS	EY	SY	AF	DEER	GM	EYh	SYh	FYh	ROeh	GMH	RetM	RetY
Aeronautics+Defense	-24.42	-10.24	0.0476	0.5567	0.0311	6:47 p.m.	19.88	0.0574	0.8261	0.0407	20.55	22.17	8.34%	23.09%
Building+Equipment	-46.04	27:40	0.0287	0.2370	0.0155	11.29	33.96	0.0429	0.8595	0.0230	9.37	25.29	11.71%	13.44%
Machinery+Conglomerates	-23.75	9.07	0.0425	0.3516	0.0256	21.65	39.39	0.0499	0.5620	0.0316	19.10	37.59	-2.20%	-1.09%
Services+Distribution	-31.58	24.14	0.0308	0.2809	0.0229	31.98	49.88	0.0412	0.4961	0.0310	21.88	48.85	4.57%	23.29%
Transport	14.61	-11.80	0.0426	0.8173	0.0295	26.61	15.82	0.0540	0.6959	0.0200	22.62	26.93	-0.49%	4.49%

Value and quality graphic

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

Evolution since last month

The most notable changes are an improvement in the value of transport and a deterioration in the quality of buildings and equipment.

Momentum

The following chart plots momentum data.

Interpretation

Transportation is undervalued by about 14% compared to 11-year averages, but its quality is slightly below the baseline. The other sub-sectors are overvalued by 24% to 46% compared to historical averages. Building/construction/equipment is the most expensive sub-sector, but an excellent quality score can partly justify it. Machinery/Conglomerates and Services/Distribution are also above the quality 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 356 holdings. The following table shows the top 10 names with some fundamental ratios. Their overall weight is 30.6%.

Teleprinter	name	Weight	EPS growth %TTM	P/E TTM	P/E front	Yield%
UNP	Union Pacific Corp.	3.98%	26.53	26:45	22.75	1.79
RTX	Raytheon Technologies Corp.	3.87%	207.28	38.16	20.42	2.09
UPS	United Parcel Service Inc.	3.86%	793.96	15.14	5:39 p.m.	2.73
HON	Honeywell International Inc.	3.28%	17.85	24.26	22.19	2.04
BA	Boeing Company	2.88%	65.65	N / A	59.21	0.00
LMT	Lockheed Martin Corporation	2.71%	-6:30 a.m.	18.83	15.98	2.61
OF	DEERE & COMPANY	2.67%	64.95	22.52	17.90	1.03
GE	General electric company	2.64%	-124.73	N / A	28.29	0.34
CAT	Caterpillar Inc.	2.55%	116.76	18.72	18.14	2.00
MMM	3M Co	2.15%	9.37	2:60 p.m.	14.23	4.04

The heaviest industries in the fund are machinery (19.3%) and aerospace/defense (17.5%). VIS has significantly more holdings than XLI (356 large-small caps versus 76 large-mid caps). However, total return and risk metrics since inception are nearly identical for both funds:

	Full return	Annual. To return to	Sample	Sharp	Volatility
SCREW	408.14%	9.76%	-63.51%	0.52	18.90%
XLI	408.67%	9.76%	-62.26%	0.53	18.42%

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 holding weighs more than 4%, so the risk associated with individual companies is low. VIS or XLI are equivalents for buy-and-hold investors. However, XLI has much higher liquidity, making it a better choice for swing trading and tactical allocation strategies.

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 0.0426 (or price/earnings less than 23.47 is in the better half of the subsector for that measure). A list of scorecards 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. The list below was sent to subscribers several weeks ago based on the data available at that time.

WIRE	Encore Wire Corp.
MATX	Matson inc.
ARCB	ArcBest Corp.
BLDR	FirstSource Builders Inc.
VNT	Vontier Corp.
LMT	Lockheed Martin Corporation
RS	Crane Co.
CARR	Carrier Global Corp.
UNVR	Univar Solutions Inc.
Bcc	Boise Cascade Co

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