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Industrial ETFs in Focus on GE Restructuring Plans - ETF News And Commentary

Sweta Killa

General Electric (GE) was a star performer in Friday’s trading session, as the stock soared more than 11%, representing the biggest one-day gain in six years. The massive gain for this conglomerate came after it announced its plan to shed most of its high-risk financial arm, GE Capital, by 2018.

The plan includes the sale of real estate assets to the private-equity giant Blackstone, Wells Fargo and others for $26.5 billion over the next two years, the disposal of other GE Capital operations including commercial lending and leasing, as well as a buyback of up to $50 billion in GE shares. The divestiture excludes the financing “verticals” related to GE’s industrial businesses, and is expected to dilute after-tax earnings by $16 billion in the first quarter (read: A Comprehensive Guide to REIT ETFs).

While GE Capital is a big money spinner and accounts for half of the profitability of the company, it carries higher risk and sometimes creates a major setback to shareholders’ return. As such, the divestiture of this unit will no doubt make the company more viable and help it to concentrate on its high-value core industrial business. The new structure will likely generate 90% of its earnings from the industrial business by 2018, up from 58% from 2014.

Further, the company now has the ability to return $90 billion to shareholders over the next few years. While the bulk $50 billion will come from the new share repurchase program announced by the company, the rest will likely stem from $35 billion in dividends from GE Capital and the completion of the spin-off its remaining 85% stake in Synchrony Financial (SYF).

Market Impact

Perked up by maximization of shareholders’ return, the market greeted the company’s move with enthusiasm. The stock reached its highest level since September 8, 2008 to $28.68 on the day on elevated volume of 8 times more than the average daily volume.  

The news also led to a surge in many industrial ETFs having the largest allocation to this industrial conglomerate giant. In particular, Fidelity MSCI Industrials Index ETF (FIDU), Vanguard Industrials ETF (VIS), iShares U.S. Industrials ETF (IYJ) and Industrial Select Sector SPDR (XLI) gained nearly 1.5% each on Friday’s trading session (see: all the Industrials ETFs here).

FIDU in Focus

This fund tracks the MSCI USA IMI Industrials Index, holding 352 stocks in its basket. General Electric takes the top spot at 10.61% share with the aerospace and defense industry making up for one-fourth of the portfolio, followed by industrial conglomerates at 18%. The product has amassed $162.3 million in its asset base while trades in good volume of more than 113,000 share a day on average.

It is one of the low cost choices in the space charging 12 bps in annual fees from investors. The fund is up 2.7% in the year-to-date period and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

VIS in Focus

This fund follows the MSCI US IMI Industrials 25/50 index and holds about 349 securities in its basket. Of these firms, GE occupies the top position with 10.1% allocation. Here again, aerospace and defense takes the top spot at 22.6% followed by industrial conglomerates at 17.2%. The fund manages a $12.1 billion in its asset base and charges 12 bps in annual fees. Volume is moderate as it exchanges 140,000 shares a day on average.

The product has added 2.4% so far in the year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

IYJ in Focus

This product provides exposure to 214 industrial stocks by tracking the Dow Jones U.S. Industrials Index. It is heavily concentrated on GE – the top firm – with 9.55% of assets while others make up for less than 4% share. Further, the ETF is tilted towards capital goods companies at 60% while transportation and software services round off the next two spots with double-digit exposure (read: Will the FedEx-TNT Deal Fuel Transport ETFs?).  

The fund has an AUM of $958.5 million and average daily volume of 203,000 shares. Expense ratio came in at 0.43%. The product has gained nearly 4% in the year-to-date time frame and has a Zacks ETF Rank of 3 with a Medium risk outlook.

XLI in Focus

This is the largest and most popular ETF in the space with AUM of $7.9 billion and average daily volume of 10.5 million shares. It follows the S&P Industrial Select Sector Index and charges 15 bps in fees per year. Holding a small basket of 67 securities, GE takes the top spot with 9.59% allocation. Form a sector look, aerospace and defense occupy the top position at 27% followed by industrial conglomerates (18.8%), machinery (15.6%) and road and rail (10.2%).

The fund has added 1.1% so far in the year and has a Zacks ETF Rank of 3 with a Medium risk outlook.

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GENL ELECTRIC (GE): Free Stock Analysis Report
 
SYNCHRONY FIN (SYF): Free Stock Analysis Report
 
FID-INDUSTL (FIDU): ETF Research Reports
 
VIPERS-INDUS (VIS): ETF Research Reports
 
ISHARS-US INDU (IYJ): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
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