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Can Industrial ETFs Gain Despite Mixed Q3 Earnings?
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The industrial sector has been delivering mixed results so far this reporting season. Of the 75.9% S&P industrial companies that have reported, 100% beat on the bottom line, while 95.5% surpassed revenue estimates. For these companies, earnings declined 14% and revenues deteriorated 6.8% year over year, per the Earnings Trends report issued on Nov 4.
The coronavirus outbreak has sparked concerns of a global economic recession among investors as the pandemic has disturbed global supply chains owing to the shutdown of economic activities. Moreover, it has caused slowdown in economic growth and business activities. However, Fed’s consistent support, progress in coronavirus vaccine research and introduction of a second round of fiscal stimulus can strengthen the industrial sector and economic growth.
In fact, the United States delivered an impressive performance in third-quarter 2020, beating market expectations. Going by, the Department of Commerce’s report on Oct 29, the GDP surged to a record high at an annualized pace of 33.1% after declining 31.4% in the second quarter.
The manufacturing sector is also delivering impressive results despite the coronavirus crisis. According to the Institute for Supply Management (ISM) report on Nov 2, its Purchasing Managers' Index (PMI) for manufacturing surged to 59.3% in October, increasing 3.4 points from last month and surpassing the consensus estimate of 55.9%. In fact, the October figure stood out as the highest PMI reading since September 2018.
Against this backdrop, we take a look at some big industrial earnings releases and see if these can leave an impact on ETFs exposed to the space.
Inside Q3 Earnings
On Oct 28, General Electric Company’s (GE - Free Report) third-quarter 2020 adjusted earnings outpaced the Zacks Consensus Estimate by 200%. The earnings beat came in after two straight quarters of weaker-than-expected results. In the quarter under review, the industrial conglomerate’s adjusted earnings were 6 cents per share against the Zacks Consensus Estimate of a loss of 6 cents. However, the bottom line decreased 60% from the year-ago quarter’s earnings per share.
Consolidated revenues totaled $19.42 billion, reflecting a year-over-year drop of 16.9%. Sluggish Industrial and GE Capital’s performance dented the quarterly results. However, the top line surpassed the consensus estimate by 1.4%.
On Oct 27, 3M Company’s (MMM - Free Report) third-quarter 2020 earnings surpassed the Zacks Consensus Estimate by 7.04%. However, sales missed estimates by 1.7%. The company’s adjusted earnings in the reported quarter were $2.43 per share. On a year-over-year basis, the bottom line declined 5.8%. In the reported quarter, 3M’s net sales totaled $8.35 billion, reflecting an increase of 4.5% from the year-ago quarter.
On Oct 30, Honeywell International Inc. (HON - Free Report) reported better-than-expected results for third-quarter 2020, wherein earnings and revenues beat estimates. Adjusted earnings were $1.56 per share, beating the Zacks Consensus Estimate of $1.49. However, the bottom line slid 25% year over year, largely due to lower sales. Honeywell’s third-quarter revenues came in at $7.80 billion, outpacing the consensus estimate of $7.66 billion. Notably, the top line decreased 14% year over year, both on reported and organic basis, primarily on account of sluggishness in end markets due to the coronavirus outbreak-led issues.
On Oct 22, Union Pacific Corporation’s (UNP - Free Report) third-quarter 2020 earnings of $2.01 per share lagged the Zacks Consensus Estimate of $2.03. The bottom line, however, decreased 9.5% on a year-over-year basis. Operating revenues came in at $4.92 billion, which lagged the Zacks Consensus Estimate of $4.98 billion. The figure slid 10.8% year over year, primarily due to weak freight revenues.
Industrial ETFs in Focus
In the current scenario, we believe it is prudent to discuss ETFs that have relatively high exposure to the industrial companies discussed (see all Industrial ETFs here).
The Industrial Select Sector SPDR Fund (XLI - Free Report)
The fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. It comprises 73 holdings, with the above-mentioned companies taking about 17.4% of the fund. The fund has lost around 1% since Oct 21 (as of Nov 5). Its AUM is $12.29 billion and expense ratio is 0.13% (read: Will Coronavirus Vaccine & Treatment Optimism Drive These ETFs?).
This fund offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. It holds about 348 securities in its basket, with the concerned companies having around 13.2% weight in the fund. The fund has lost around 0.6% since Oct 21 (as of Nov 5). Its AUM is $3.20 billion and expense ratio is 0.10% (read: U.S. Industrial Output Continues to Rise in June: ETFs to Gain).
The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index. The fund has lost about 0.6% since Oct 21 (as of Nov 5). It comprises 333 holdings and puts about 13.6% weight in the companies discussed above. Its AUM is $425.3 million and expense ratio, 0.08%.
The iShares U.S. Industrials ETF seeks to track the investment results of the Dow Jones U.S. Industrials Index. It holds about 182 securities in its basket and puts about 10.8% weight in the companies in focus. The fund has lost around 1% since Oct 21 (as of Nov 5). Its AUM is $959.5 million and expense ratio is 0.42%.
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Can Industrial ETFs Gain Despite Mixed Q3 Earnings?
The industrial sector has been delivering mixed results so far this reporting season. Of the 75.9% S&P industrial companies that have reported, 100% beat on the bottom line, while 95.5% surpassed revenue estimates. For these companies, earnings declined 14% and revenues deteriorated 6.8% year over year, per the Earnings Trends report issued on Nov 4.
The coronavirus outbreak has sparked concerns of a global economic recession among investors as the pandemic has disturbed global supply chains owing to the shutdown of economic activities. Moreover, it has caused slowdown in economic growth and business activities. However, Fed’s consistent support, progress in coronavirus vaccine research and introduction of a second round of fiscal stimulus can strengthen the industrial sector and economic growth.
In fact, the United States delivered an impressive performance in third-quarter 2020, beating market expectations. Going by, the Department of Commerce’s report on Oct 29, the GDP surged to a record high at an annualized pace of 33.1% after declining 31.4% in the second quarter.
The manufacturing sector is also delivering impressive results despite the coronavirus crisis. According to the Institute for Supply Management (ISM) report on Nov 2, its Purchasing Managers' Index (PMI) for manufacturing surged to 59.3% in October, increasing 3.4 points from last month and surpassing the consensus estimate of 55.9%. In fact, the October figure stood out as the highest PMI reading since September 2018.
Against this backdrop, we take a look at some big industrial earnings releases and see if these can leave an impact on ETFs exposed to the space.
Inside Q3 Earnings
On Oct 28, General Electric Company’s (GE - Free Report) third-quarter 2020 adjusted earnings outpaced the Zacks Consensus Estimate by 200%. The earnings beat came in after two straight quarters of weaker-than-expected results. In the quarter under review, the industrial conglomerate’s adjusted earnings were 6 cents per share against the Zacks Consensus Estimate of a loss of 6 cents. However, the bottom line decreased 60% from the year-ago quarter’s earnings per share.
Consolidated revenues totaled $19.42 billion, reflecting a year-over-year drop of 16.9%. Sluggish Industrial and GE Capital’s performance dented the quarterly results. However, the top line surpassed the consensus estimate by 1.4%.
On Oct 27, 3M Company’s (MMM - Free Report) third-quarter 2020 earnings surpassed the Zacks Consensus Estimate by 7.04%. However, sales missed estimates by 1.7%. The company’s adjusted earnings in the reported quarter were $2.43 per share. On a year-over-year basis, the bottom line declined 5.8%. In the reported quarter, 3M’s net sales totaled $8.35 billion, reflecting an increase of 4.5% from the year-ago quarter.
On Oct 30, Honeywell International Inc. (HON - Free Report) reported better-than-expected results for third-quarter 2020, wherein earnings and revenues beat estimates. Adjusted earnings were $1.56 per share, beating the Zacks Consensus Estimate of $1.49. However, the bottom line slid 25% year over year, largely due to lower sales. Honeywell’s third-quarter revenues came in at $7.80 billion, outpacing the consensus estimate of $7.66 billion. Notably, the top line decreased 14% year over year, both on reported and organic basis, primarily on account of sluggishness in end markets due to the coronavirus outbreak-led issues.
On Oct 22, Union Pacific Corporation’s (UNP - Free Report) third-quarter 2020 earnings of $2.01 per share lagged the Zacks Consensus Estimate of $2.03. The bottom line, however, decreased 9.5% on a year-over-year basis. Operating revenues came in at $4.92 billion, which lagged the Zacks Consensus Estimate of $4.98 billion. The figure slid 10.8% year over year, primarily due to weak freight revenues.
Industrial ETFs in Focus
In the current scenario, we believe it is prudent to discuss ETFs that have relatively high exposure to the industrial companies discussed (see all Industrial ETFs here).
The Industrial Select Sector SPDR Fund (XLI - Free Report)
The fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. It comprises 73 holdings, with the above-mentioned companies taking about 17.4% of the fund. The fund has lost around 1% since Oct 21 (as of Nov 5). Its AUM is $12.29 billion and expense ratio is 0.13% (read: Will Coronavirus Vaccine & Treatment Optimism Drive These ETFs?).
Vanguard Industrials ETF (VIS - Free Report)
This fund offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. It holds about 348 securities in its basket, with the concerned companies having around 13.2% weight in the fund. The fund has lost around 0.6% since Oct 21 (as of Nov 5). Its AUM is $3.20 billion and expense ratio is 0.10% (read: U.S. Industrial Output Continues to Rise in June: ETFs to Gain).
Fidelity MSCI Industrials Index ETF (FIDU - Free Report)
The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index. The fund has lost about 0.6% since Oct 21 (as of Nov 5). It comprises 333 holdings and puts about 13.6% weight in the companies discussed above. Its AUM is $425.3 million and expense ratio, 0.08%.
iShares U.S. Industrials ETF (IYJ - Free Report)
The iShares U.S. Industrials ETF seeks to track the investment results of the Dow Jones U.S. Industrials Index. It holds about 182 securities in its basket and puts about 10.8% weight in the companies in focus. The fund has lost around 1% since Oct 21 (as of Nov 5). Its AUM is $959.5 million and expense ratio is 0.42%.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>