Industrial SPDR (ETF) (AMEX:XLI)

Terrorism threats and the ongoing military action in the Middle East make the aerospace and defense sector a bright spot. In the recent times the defense contractors have become more efficient generating strong cash flows and the Democratic win of Congress sees no real risk to the defense budget of United States till 2010. Moreover there has been a significant increase in the passenger traffic boosted by global economic growth and attractive fare. This makes the outlook for the commercial aircraft segment positive with great demand for 100 plus seater jets.

The Industrial Select Sector SPDR Fund (XLI) is an index fund that seeks to replicate the total return of the Industrial Select Sector of the Standard and Poor's 500 Composite Stock Index. Investment are made primarily in the building products, construction, engineering, electrical equipment, industrial conglomerates, machinery, aerospace, defense and commercial supplies. The fund manages total assets worth approximately $1,070 million and comprises mainly the large cap of Standards and Poors 500 index.

About one-third of the corpus constitute industrial conglomerates making the fund more diversified with greater exposure to international markets and the recent weakening of U.S dollar would supplement exports led growth. However the fortunes of the fund are greatly tied to the performance of General Electric that account for more than one fifth of the fund. Moreover the stock is considered risky in terms of standard deviation compared to its peers.

Though the fund had a tough time loosing out in thirteen of the last 27 quarters through September 2005 it had put up good performance in the past two years. Endorsing the same it had posted 13.51% for year ending December 2006. The market does not have much to offer in the in the Industrial and basic material category and XLI comes at an attractive valuation with a low expense ratio of 0.24%.