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Can Industrial ETFs Gain Despite Mixed Q4 Earnings?

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The industrial sector, which faced disruption in global supply chains and factory closedowns, is expected to rebound on recovery from the coronavirus-led slump. The introduction of a coronavirus vaccine and addition of stimulus are expected to drive demand and economic activities in the sector.

The beginning of the inoculation process among people is highly driving optimism. Notably, the two frontrunners in the COVID-19 vaccine race, namely, Moderna (MRNA) and Pfizer/BioNTech, have received the emergency use authorization from the FDA for their coronavirus vaccines. This positive development has increased hopes that the economy will reopen and gradually operate at the pre-pandemic level.

Amid the pandemic, the central bank has pledged to hold rates at a near-zero level and will continue with the asset purchase program at the current rate until “substantial further progress” is made to reach a state of healthy inflation and maximum employment levels. Thus, the second trench of coronavirus-aid package, an ultra-dovish monetary stance maintained by the Fed and record low benchmark interest rate of 0-0.25% are making a stronger case in favor of the industrial sector in 2021.

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 Q4 Earnings

On Jan 26, General Electric Company’s (GE - Free Report) fourth-quarter 2020 adjusted earnings were on par with the Zacks Consensus Estimate. In the quarter under review, the industrial conglomerate’s adjusted earnings were 8 cents per share, in line with the Zacks Consensus Estimate. However, the bottom line decreased 60% from the year-ago quarter’s earnings of 20 cents per share on sluggish sales generation, partially offset by lower costs and expenses.

Consolidated revenues totaled $21.93 billion, reflecting a year-over-year drop of 16.4%. Sluggish Industrial and GE Capital’s performance dented the quarterly results. However, the top line surpassed the consensus estimate by 3.1%.

On Jan 26, 3M Company’s (MMM - Free Report) fourth-quarter 2020 earnings and sales outpaced the consensus estimate by 8.7% and 1.1%, respectively. The company’s adjusted earnings in the reported quarter were $2.38 per share. On a year-over-year basis, the bottom line rose 22.1%. In the reported quarter, 3M’s net sales totaled $8.58 billion, reflecting an increase of 5.8% from the year-ago quarter.

On Jan 29, Honeywell International Inc. (HON - Free Report) reported better-than-expected results for fourth-quarter 2020, wherein earnings and revenues beat estimates. Adjusted earnings were $2.07 per share, beating the Zacks Consensus Estimate of $2.00. Moreover, the bottom line rose 0.5% year over year. Honeywell’s fourth-quarter revenues came in at $8.90 billion, outpacing the consensus estimate of $8.36 billion. Notably, the top line decreased 6% year over year on a reported basis and 7% on an organic basis, primarily on account of sluggishness in end markets due to the coronavirus outbreak-led issues.

On Jan 21, Union Pacific Corporation’s (UNP - Free Report) fourth-quarter 2020 earnings of $2.36 per share (excluding 31 cents from non-recurring items) outpaced the Zacks Consensus Estimate of $2.25. The bottom line was up 16.8% on a year-over-year basis. Operating revenues came in at $5.14 billion, which marginally surpassed the Zacks Consensus Estimate. The figure slid 1% year over year, primarily due to a decline in 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:

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 18.1% of the fund. Its AUM is $16.37 billion and expense ratio is 0.12%. The fund has lost 4.5% since Jan 21 (as of Feb 2) (read: 5 Top-Ranked ETFs That Investors Can Bet On).

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 355 securities in its basket, with the concerned companies having around 13.8% weight in the fund. The fund has lost 4.5% since Jan 21 (as of Feb 2). Its AUM is $4.21 billion and expense ratio is 0.10% (read: Cyclical ETFs in Spotlight on Biden's American Rescue Plan).

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 25-25 NR USD. The fund has lost 4.5% since Jan 21 (as of Feb 2). It comprises 335 holdings and puts about 14.1% weight in the companies discussed above. Its AUM is $610.8 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 185 securities in its basket and puts about 11% weight in the companies in focus. The fund has lost 4.1% since Jan 21 (as of Feb 2). Its AUM is $1.32 billion and expense ratio is 0.42%.

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