Sector Funds as a Quick Read on Your Customers' Industries: A Guide for Contractors and Fleets

Every contractor, fleet operator and equipment dealer depends on a handful of customer industries. A paving company lives on public works and commercial building. A refrigerated carrier lives on grocery and food distribution. A machine shop may live on aerospace or energy. When those industries slow down, the phone stops ringing a few months later. Sector funds give you a free, daily read on how investors see those industries, long before the slowdown shows up in your bid requests.

What a sector fund is

An exchange-traded fund, or ETF, is a basket of stocks that trades like a single stock. The S&P 500 is split into 11 sectors, and each one has a widely followed fund that holds the big companies in it: industrials, materials, energy, financials, real estate, utilities, consumer staples, consumer discretionary and more. GTA's rundown of the 11 S&P 500 sectors and the funds that track them lists each one and what it holds.

Match the funds to your customers

Start by writing down where your revenue really comes from, then pick the two or three funds that match it.

• Industrials: machinery makers, railroads, airlines, defense and building products. A good proxy for plant, freight and infrastructure work. See the explainer on what moves the industrials fund.

• Consumer discretionary: retailers, restaurants, homebuilders and automakers. If your work depends on remodels, store build-outs or new homes, this is your customer.

• Consumer staples: grocery, beverage and household goods. Steadier demand, and a common home for food haulers and warehouse operators.

• Energy, materials, financials, real estate and utilities: oilfield services, aggregates, lenders, landlords and power companies, each with its own fund.

Read the pair, not just one fund

One useful habit is to compare the discretionary fund with the staples fund. When investors favor discretionary names, they expect households and businesses to keep spending on wants. When they shift to staples, they are bracing for a slowdown and buying companies that sell needs. GTA's guide to the discretionary fund and the risk-appetite pair explains how to read that spread. A residential contractor who sees staples leading for weeks may want to tighten estimates and keep a little more cash on hand.

Watch where money rotates

Large investors move money between sectors as the economy shifts, often favoring industrials and materials early in a recovery and utilities and staples late in a cycle. Seeing that movement does not tell you exactly when your orders will change, but it shows which way the wind is blowing. The primer on how money moves between sectors through a cycle walks through the typical order.

How to use it in a few minutes a week

Once a week, check how your two or three customer funds did over the past month compared with the broad market. If your customer sector is lagging badly, ask your largest accounts about their plans before you commit to a big purchase or a long lease. If it is leading, it may be a good time to add capacity while demand is firm. Our earlier guide to the ISM manufacturing index and equipment demand adds a monthly survey of purchasing managers to the same picture, and retail sales and GDP for residential contractors covers the consumer side.

A signal, not a guarantee

Sector funds reflect investor expectations, which can be wrong, and they are dominated by the largest companies in each sector, which may not look like your local customers. Use them as a signal, not a guarantee, next to what you hear directly from your accounts. This article is general education and not investment advice. Prices, charts and flow data on sector funds and the stocks inside them are on a sector-by-sector market terminal from Global Traders Academy.

Add capacity when your customers are growing

When your customer industries are strong, the right equipment lets you take on more of their work. BFC Equipment Loans finances new and used machines, trucks and trailers for contractors and fleets nationwide, with terms built around how your business earns. Start your BFC application to add capacity.