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John Deere's Weak Q2 Results Drag Down Agribusiness ETFs

Sweta Killa

Before the opening bell on Friday May 17, the world’s largest agricultural equipment maker, Deere & Co DE, reported disappointing second-quarter fiscal 2019 results. The company’s earnings lagged estimates for the fifth straight quarter, forcing it to cut its fiscal 2019 outlook, which reflects the escalated tension in the U.S.-China trade war. This is especially true as farmers, particularly, have been caught in the crossfire of trade and commodities, such as soybeans, which were the worst hit. However, the company’s revenues exceeded the consensus mark.

Earnings per share came in at $3.52, well below the Zacks Consensus Estimate of $3.58 but improved 12% from the year-ago period. Moreover, revenues grew 5.8% year over year to $10.27 billion and edged past the Zacks Consensus Estimate of $10.15 billion.

For fiscal 2019, the farm equipment giant slashed its total sales guidance from 7% to 5% while net income view to $3.3 billion from $3.6 billion. However, the company expects equipment sales to increase 5% year over year but agricultural exports to persistently suffer. Softening conditions in the agricultural sector emanated from the US-China trade war and a delayed planting season across much of North America have made farmers cautious about their new equipment purchases and prompted John Deere to trim its projection (read: Forget Trade Fears, Invest in Defensive Sector ETFs).

In fact, the slump in demand for big agricultural machines has compelled the company to lower its production by 20% at two of its large factories in North America.

Market Impact

Shares of DE declined 7.6% following the announcement of its disappointing results that confirms the worst post-earnings performance in 4 years. Trading volume was also heavy with around 7.8 million shares exchanged in hand compared with average daily volume of around 1.9 million shares. Currently, John Deere has a Zacks Rank #3 (Hold) and a VGM Score of A. Rough trading might continue in the ETF world as well as over the next few days, especially among those with the largest allocation to this farm equipment giant. Below, we have highlighted some of those funds (see: all Materials ETFs here).

iShares MSCI Global Agriculture Producers ETF VEGI

This fund provides global exposure to 142 companies that produce fertilizers and agricultural chemicals, farm machinery, packaged foods and meats by tracking the MSCI ACWI Select Agriculture Producers Investable Market Index. Holding 142 stocks in its basket, Deere takes the top spot at 14.3% share. American firms account for 44.3% of the assets while Canada, Norway, Japan and Hong Kong round off the next four spots. The ETF is less popular and illiquid with $28 million in AUM and around 3,000 shares in average daily volume. It charges 39 bps in fees per year from investors and has lost 1.4% on the day after John Deere released earnings results (read: China's Retaliation Puts These ETFs and Stocks in Focus).

First Trust Indxx Global Agriculture ETF FTAG

This ETF follows the Indxx Global Agriculture Index, which is a market capitalization weighted index, designed to measure the performance of companies, directly or indirectly engaged in improving the agricultural yields. It holds 41 stocks in its basket with John Deere occupying the top position at 10%. From the perspective of industrial exposure, chemicals take the largest share at 46.2% followed by 23.6% in machinery, equipment & components. Here again, the United States is the top country with 40.2% share while Germany and Japan round off the next two with a double-digit exposure each. FTAG is the overlooked ETF, having accumulated $4.3 million in AUM and trading in average daily volume of under 1,000 shares. It charges 70 bps in annual fees and inched down 1.5% following John Deere results.

VanEck Vectors Natural Resources ETF HAP

With AUM of $68.5 million, this fund offers broadly diversified natural resources exposure by tracking the VanEck Natural Resources Index, which measures the performance of the companies, involved in six natural resources segments (including agriculture, energy, metals and renewable energy). It holds 296 stocks in its basket with John Deere taking the top spot at 8.4% of assets. Here too, American firms dominate the portfolio with nearly 44% share and materials is the top sector with 35.4%. The ETF charges 50 bps in annual fees and trades in an average daily volume of 10,000 shares. It has slipped 1.2% on the day post John Deere results.

VanEck Vectors Agribusiness ETF MOO

This fund is by far the most popular choice in the space with an AUM of about $716 million and average daily volume of 71,000 shares. It tracks the MVIS Global Agribusiness Index, which offers exposure to companies, involved in agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and farm machinery, aquaculture and fishing, livestock, cultivation and plantations, and trading of agricultural products. The fund holds 58 securities in its basket with John Deere capturing the second position at 8% allocation. It charges 54 bps in annual fees and has shed 1.6% of value on the day John Deere reported earnings numbers (Trade-Sensitive Sector ETFs in Focus on New Tariff Threat).

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