Best Ways to Profit from the Industrial Sector’s 2025 Comeback

Key Points

• Government infrastructure projects will significantly boost demand for industrial goods and services throughout 2025.
• The reshoring trend will drive substantial growth in domestic manufacturing and related industries, creating numerous investment opportunities.
• Automation and AI-driven advancements promise to enhance industrial efficiency and productivity, leading to increased profitability for many companies.

 

The current tech boom has long overshadowed the industrial sector, but it is starting to show promising signs of a resurgence in 2025. While recent months have presented challenges, a mixture of factors suggests a potential rebound is on the horizon. Informed investors can position themselves strategically to capitalize on this potential upswing through exchange-traded funds (ETFs) like the Industrial Select Sector SPDR Fund NYSEARCA: XLI and the Invesco Dorsey Wright Industrials Momentum ETF NASDAQ: PRN. These two ETFs, while sharing a common sector focus, offer distinct investment strategies, allowing investors to tailor their approach based on their risk tolerance and investment objectives.

The 2025 Industrial Surge: A Perfect Storm of Growth Catalysts

Several powerful forces are converging to create a potentially lucrative environment for industrial growth in 2025. The trend of reshoring, or bringing manufacturing operations back to domestic markets, is gaining significant momentum. This shift is driven by a multifaceted desire for enhanced supply chain resilience, reduced geopolitical vulnerabilities, and the attraction of government incentives aimed at boosting domestic manufacturing. Companies across multiple sectors are actively investing in domestic production facilities, creating a surge in demand for industrial equipment, materials, and services.

Substantial government investments in infrastructure projects further amplify this reshoring wave. The United States' Bipartisan Infrastructure Law, along with similar initiatives worldwide, is channeling billions of dollars into projects that directly benefit industrial companies. Construction of new roads, bridges, and transit systems, for example, translates into heightened demand for heavy machinery, building materials, and related services.

Technological advancements, particularly in automation and artificial intelligence (AI), are also playing a critical role. Automation is rapidly enhancing manufacturing efficiency and productivity, leading to cost reductions and increased output. AI-powered predictive maintenance and optimized logistics systems are adding to this efficiency drive, allowing industrial firms to operate more smoothly and profitably. The anticipated easing of inflationary pressures and stabilization of global supply chains will further boost profit margins, creating a more attractive investment landscape for the industrial sector.

A Diversified Approach to Industrial Investing

The Industrial Select Sector SPDR Fund (XLI) provides investors with broad exposure to the industrial sector through a market-capitalization-weighted strategy. This approach tracks the S&P Industrials Select Sector Index, offering diversification across a wide range of sub-sectors, including aerospace, machinery, construction, and transportation. XLI's top holdings include a solid roster of prominent players offering a healthy and diversified portfolio that mitigates risk associated with individual company performance.

Recent performance figures for XLI reflect the sector's mixed performance. The ETF has demonstrated considerable year-to-date growth but has shown some weakening in the most recent short-term data. Its low net expense ratio of 0.09% makes it a cost-effective choice for investors seeking broad industrial sector exposure. Further enhancing its appeal, XLI offers a modest dividend yield, currently standing at 1.17%, providing a steady stream of income for shareholders.

Harnessing Momentum for Enhanced Returns

The Invesco Dorsey Wright Industrials Momentum ETF (PRN) adopts a fundamentally different approach. This actively managed ETF focuses on industrial companies demonstrating strong price momentum or, essentially, stocks exhibiting recent upward trends. This momentum-based strategy aims to capitalize on companies experiencing rapid growth, potentially delivering higher returns than market-cap-weighted ETFs like XLI. However, this comes with a correspondingly higher risk profile, as momentum strategies tend to be more volatile and susceptible to market corrections.

PRN's top holdings reveal a focus on companies positioned for growth in a set of industrial niches. Recent performance has been significantly stronger than XLI’s year-to-date, further illustrating the potential for higher, though more volatile, returns from a momentum-based approach. However, it’s important to recognize that PRN has a higher expense ratio (0.60%) than XLI, reflecting its active management strategy.

A Tale of Two Strategies

XLI and PRN represent two distinct strategies for navigating the industrial sector’s projected growth. XLI, with its market-capitalization weighting, provides broad diversification, mitigating risk while delivering consistent, moderate returns. PRN's momentum-based strategy, while potentially more volatile, offers the opportunity for amplified returns, attracting investors with a higher risk tolerance and a focus on capital appreciation. The choice between these ETFs ultimately depends on an investor's individual risk profile and investment goals. The cautious investor focused on steady returns and broader market participation might favor XLI. In contrast, growth-oriented investors who are willing to accept higher volatility for the potential for greater returns might prefer PRN.

Seizing the Industrial Opportunity

The industrial sector stands at the cusp of a potential comeback, poised to benefit from reshoring, infrastructure spending, and technological advancements. XLI and PRN offer compelling avenues for participating in this projected growth, providing investors with choices aligned with diverse risk profiles and investment objectives. While the potential rewards are attractive, investors should always approach the market with caution and a thorough understanding of their risk tolerance, ensuring their investment strategy aligns with their long-term financial goals. Past performance, while providing valuable insight, should never be interpreted as a guarantee of future success.