The U.S. market, as indicated by the S&P 500 and the Dow Jones Industrial Average indexes, gathered steam again to start July, marking an end to the Fed tapering panic. Both benchmarks rebounded nicely and are at new all-time highs heading into the heart of the second quarter earnings season.
Though the tech sector has reported disappointing earnings results (17 tech stocks missed their estimates so far by 3.6% on average), industrials reported some good numbers on the earnings front with General Electric (GE - Analyst Report) leading the way (read: Tech ETFs Slump on Microsoft Earnings Miss). Net earnings at Honeywell International (HON) and Ingersoll-Rand (IR) also surpassed estimates, suggesting a pretty good trend for the sector.
General Electric in Focus
General Electric, the industrial conglomerate giant, reported mixed results in the second quarter. Earnings of 36 cents per share were down 5% from the year-ago quarter but outpaced our Zacks Consensus Estimate by a penny.
Revenues slid 4% year over year to $35.1 billion and also missed our estimate of $35.7 billion. Strong performances at oil and gas, aviation, energy management and home & business solutions were offset by sluggish power & water and capital segments.
The company saw a surprising jump in orders during the quarter. On a year-over-year basis, orders soared 20% in the U.S. and 2% in Europe. In China, orders increased slightly amid an economic slowdown (read: China ETFs Tumbling on Fears of Credit Crunch).
For 2013, the company seems on track to achieve high single-digit or low double-digit growth in earnings and a 5% rise in revenues.
This news, especially the record backlog, was well received by the market, as GE shares climbed on the day. Shares were trading higher at close to 5% on the session, the highest level since September 2008, with volume at nearly four times a normal day.
This surge in the share price reflects the confidence in the company's transformation to a more focused industrial conglomerate. General Electric is shrinking its banking division and has exited from the media and other non-industrial businesses. This reshuffle appears compelling, as GE is apparently focused on its core business (read: 3 Top Ranked Sector ETFs for Earnings Season).
Based on the solid run in GE’s share price, a number of industrial ETFs that have big allocations to GE also gained on the day. Investors could play the bullish outlook on GE—and the rest of the industrial sector-- with the following three industrial ETFs, which all appear well positioned in the current market environment:
Vanguard Industrials ETF (VIS - ETF report)
VIS tracks the MSCI US Investable Market Industrials 25/50 Index, holding just over 350 stocks in its basket. With its many securities, the fund obviously has a broad focus on the industrial world, although it does have a large cap tilt.
GE is currently the top allocation at 12.3% of assets while United Technologies (UTX), Boeing Co. (BA) and Union Pacific (UNP) round off to the next three spots with a combined 11.6% share. The fund has accumulated $872.1 million so far and trades in good volume of nearly 97,000 shares a day.
This ETF gained about 1.0% in Friday trading and is up over 6.6% so far in July. The fund currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Medium’ risk outlook.
Industrial Select Sector SPDR (XLI - ETF report)
This is by far the most popular industrial ETF in the space with more than $5.8 billion in AUM and an average daily volume of nearly 11 million shares. The fund follows the S&P Industrial Select Sector Index, holding roughly 64 stocks in its basket.
The ETF has a heavy skew towards large cap securities, though it has a pretty even distribution in terms of industries (read: Winning ETF Strategies for the Second Half).
The product allocates about one-fourth of the assets to aerospace & defense while machinery, industrial conglomerates and road & rail make up for double-digit allocation. In terms of holdings, once again GE is the top company by weighting, accounting for roughly 11.3% of assets. Beyond that, UTX, UNP and BA occupy the next three positions in the basket with a combined 15.5% share.
This ETF added about 1.0% in Friday trading and 6.5% so far this month. XLI currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Low’ risk outlook.
iShares U.S. Industrials ETF (IYJ - ETF report)
The ETF tracks the Dow Jones U.S. Industrials Index, providing broad exposure to about 224 securities. The fund focuses more on large caps and has more than $1.2 billion in AUM while average daily volume is under 165,000 shares.
While GE is the top company in the fund with 10.8% of assets, many other in-focus companies round out the rest of the top five. These include UTX, UNP, BA and 3M Co. (MMM) as each of these account for at least 3% share in the basket. From an industry look, the product is widely diversified with general industrials, support services, aerospace & defense, engineering and transportation making a nice mix in the portfolio.
The fund gained 0.90% on Friday and 6.4% so far in July. The ETF currently has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Low’ risk outlook (read: 3 Hot Sector ETFs Surging to #1 Ranks).
General Electric’s earnings beat sent the stock higher on the day, and indicated strong growth prospects of the firm over the long term. With the U.S. economy continuing to improve, investors are tempted to move to cyclical stocks like industrials (see more in the Zacks ETF Center).
The sector is currently seeing strength from improving domestic demand for industrial equipment, expanding manufacturing activity, rising exports and growing orders. Further, the sector is expected to be protected from the worst of the current global malaise and lead markets during an upswing.
Given this, investors seeking higher returns could find these products intriguing picks as we progress further into the second half of the year.
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