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Should You Buy Industrial ETFs After GE Disappoints?

On January 20, General Electric GE reported mixed fourth-quarter 2016 results. Though earnings per share of 46 cents matched the Zacks Consensus Estimate, revenues of $33.1 billion fell short of $34.1 billion. On a year-over-year basis, earnings and revenues declined 12% and 2.4%, respectively.

For 2017, the company expects earnings per share of $1.60–$1.70, the midpoint of which is in line with the Zacks Consensus Estimate. Additionally, organic revenues are expected to grow 3–5%.

GE is facing a “slow-growth and volatile environment.” The weakness in the oil and gas unit will persist this year after a difficult 2016. Further, the future growth of the industrial conglomerate giant largely hinges on the new president Donald Trump’s policies. This is because the corporate tax reform under the new administration could benefit the company while the change in U.S. healthcare laws might dent its overall revenue (see: all the Industrials ETFs here).

As a result, the stock currently has a Zacks Rank #3 (Hold) with a VGM Style Score of F. However, it falls in an attractive industry having a Zacks Rank in the top 29%, suggesting that Trump’s pro-growth policies will drive growth in the industry in coming months.

Market Impact

Given the woes and disappointing results, shares of GE dropped 2.2% at the close of trading, representing the biggest decline in four months. As such, industrial ETFs having the largest allocation to this industrial conglomerate giant are in focus for the days ahead.

iShares Edge MSCI Multifactor Industrials ETF INDF

This ETF debuted in the space seven months ago and has already attracted $2.8 million in its asset base. It trades in a meager volume of less than 1,000 shares. It targets inexpensive stocks, financially healthy firms, trending stocks and relatively smaller companies by tracking the MSCI USA Industrials Diversified Multiple-Factor Capped Index. Holding 42 stocks in its basket, GE is the top firm accounting for 12% of the portfolio. In terms of industrial exposure, about 63.3% of the portfolio is dominated by capital goods while transportation, and commercial & professional services round off the next two spots with a double-digit exposure each. INDF added 0.08% post GE results and charges 35 bps in fees per year.

Fidelity MSCI Industrials Index ETF FIDU

This fund tracks the MSCI USA IMI Industrials Index, holding 338 stocks in its basket. General Electric takes the top spot at 11% allocation with the aerospace and defense industry making up for 20.3% of the portfolio, followed by industrial conglomerates at 19.8%. The product has amassed $267.4 million in its asset base while trades in moderate volume of nearly 83,000 share a day on average. It is one of the low cost choices in the space charging 8 bps in annual fees from investors. The fund lost 0.1% following GE results and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: 5 Top-Ranked Sector ETFs Thankful to Trump).

Vanguard Industrials ETF VIS

This fund follows the MSCI US IMI Industrials 25/50 index and holds about 348 securities in its basket. Of these firms, GE occupies the top position with 11% allocation. Here, industrial conglomerates takes the top spot at 19.5% followed by aerospace and defense at 19.3%. The fund manages $2.7 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as it exchanges 137,000 shares a day on average. The product gained 0.05% on the day and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

Industrial Select Sector SPDR XLI

This is the largest and most popular ETF in the space with AUM of $10.2 billion and average daily volume of more than 10.7 million shares. It follows the Industrial Select Sector Index and charges 14 bps in fees per year. Holding a small basket of 69 securities, GE takes the top spot with 9.6% share. Form an industrial look, aerospace and defense occupy the top position at 22.2% followed by industrial conglomerates (20.5%) and machinery (15.8%). The fund added 0.02% on the day and has a Zacks ETF Rank of 2 with a Medium risk outlook (read: Trump Effect Elevated These Sector ETFs to Rank #1).

iShares U.S. Industrials ETF IYJ

This product offers exposure to 208 companies that produce goods used in construction and manufacturing. It tracks the Dow Jones U.S. Industrials Index and charges investors 44 bps in annual fees. GE occupies the top position accounting for 9.7% share in the basket. Further, the ETF is tilted toward capital goods’ companies at 59.3% while transportation and software services round off the next two spots with over 12% allocation each. The fund has AUM of $1 billion and average daily volume of 122,000 shares. The product gained 0.02% following GE results and carries a Zacks ETF Rank of 2 with a Medium risk outlook.

Bottom Line

Investors should note that the decline in the GE share price has not affected these ETFs much despite their largest allocation to the company. This is because the funds have a spread out exposure to a number of firms in various types of industries suggesting that the space can easily counter small declines from some of its biggest components. Further, the gains in these industrial ETFs are the result of Trump’s optimism on the sector after he took office on Friday.

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General Electric Company (GE): Free Stock Analysis Report
VIPERS-INDUS (VIS): ETF Research Reports
SPDR-INDU SELS (XLI): ETF Research Reports
FID-INDUSTL (FIDU): ETF Research Reports
ISHRS-EMS M IND (INDF): ETF Research Reports
ISHARS-US INDU (IYJ): ETF Research Reports
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