Industrial ETFs Are Gaining Despite Mixed Q2 Earnings

The industrial sector has been delivering mixed results so far this reporting season. Of the 93.1% S&P industrial companies that have reported, 96.3% beat on the bottom line while 81.5% surpassed revenue estimates. For these companies, earnings declined 39.8% and revenues deteriorated 18.9% year over year, per the Earnings Trends report issued on Aug 12.

The coronavirus outbreak has caused an unprecedented collapse in economic activities as governments had to shut down commerce and implemented social-distancing measures in an effort to contain the spread of the virus. The pandemic is sparking fears of a global economic recession among investors as the outbreak is disrupting global supply chains owing to the shutdown of economic activities.

However, the improving manufacturing numbers have instilled optimism among investors. The U.S. ISM Manufacturing PMI came in at 54.2 for July 2020, up from 52.6 in the previous month and beat market expectations of 53.6. That is the highest reading since March 2019 as manufacturing activity is recovering after the pandemic-induced turbulence. A reading above 50 indicates expansion in manufacturing, which makes up about 11% of the U.S. economy, per a Reuters article. Also, the U.S. economy has started to reopen in phases and there is massive Fed and government stimulus to combat the crisis which can help the sector rebound.

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 Q2 Earnings

On Jul 29, General Electric Company (NYSE:GE)’s GE second-quarter 2020 adjusted loss was 15 cents per share wider than the Zacks Consensus Estimate of loss of 14 cents. Moreover, the bottom line compares unfavorably with the year-ago quarter’s earnings of 16 cents per share. Consolidated revenues totaled $17.75 billion, reflecting a year-over-year drop of 24.2%. Sluggish Industrial and GE Capital’s performance hurt the quarterly results. However, revenues beat the Zacks Consensus Estimate of $17.01 billion.

On Jul 28, 3M Company (NYSE:MMM)’s MMM second-quarter 2020 earnings surpassed the Zacks Consensus Estimate by 0.56%. However, sales lagged estimates by 1.27%. The company’s adjusted earnings in the reported quarter were $1.78 per share. On a year-over-year basis, bottom-line results declined 16.4% due to adverse impacts of organic sales decline, various woes related to the pandemic, acquisitions/divestitures and forex woes (5 cents per share). However, savings from cost-related actions (to the tune of $400 million), lower tax rate and a fall in share count positively impacted results. In the reported quarter, 3M’s net sales totaled $7.18 billion, reflecting a decrease of 12.2% from the year-ago quarter.

On Jul 24, Honeywell International Inc (NYSE:HON). HON reported better-than-expected results for second-quarter 2020, wherein earnings and revenues beat estimates. Adjusted earnings were $1.26 per share, beating the Zacks Consensus Estimate of $1.15. However, the bottom line slid 40% year over year largely due to lower sales. Honeywell’s second-quarter revenues came in at $7.48 billion, outpacing the consensus estimate of $7.24 billion. Notably, the top line decreased 19% year over year primarily due to an 18% decline in organic revenues on account of sluggishness in end markets due to the coronavirus outbreak-led issues and oil price volatility.

On Jul 23, Union Pacific Corporation (NYSE:UNP)’s UNP second-quarter 2020 earnings of $1.67 per share beat the Zacks Consensus Estimate of $1.61. The bottom line, however, decreased 24.8% on a year-over-year basis. Operating revenues came in at $4.24 billion, which lagged the Zacks Consensus Estimate of $4.40 billion. The figure slid 24.2% year over year primarily due to weak freight revenues (down 24%).

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

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 17.1% of the fund. The fund has gained 6.3% since Jul 22 (as of Aug 13). Its AUM is $11.27 billion and expense ratio is 0.13% (read: Is Industrials Sector the New Rising Star? ETFs in Focus).

Vanguard Industrials ETF VIS

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 13.7% weight in the fund. The fund has gained 6.6% since Jul 22 (as of Aug 13). Its AUM is $3.05 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

The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI (LON:IMI) Industrials Index. The fund has gained 6.7% since Jul 22 (as of Aug 13). It comprises 326 holdings and puts about 13.3% weight in the companies discussed above. Its AUM is $379.5 million and expense ratio, 0.08%.

iShares U.S. Industrials ETF IYJ

The iShares U.S. Industrials ETF seeks to track the investment results of the Dow Jones U.S. Industrials Index. It holds about 205 securities in its basket and puts about 10.4% weight in the companies in focus. The fund has gained 5.2% since Jul 22 (as of Aug 13). Its AUM is $862.1 million and expense ratio is 0.42%. The fund carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook.

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