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Material ETFs Stand Tall Amid Weak Q4 Earnings

Sweta Killa

Basic materials is one of the weakest sectors this reporting cycle. Earnings from about 70.5% of the sector’s total market capitalization reported so far are down 5.5% on 0.6% revenue growth.

Let’s dig into the earnings report of some of the well-known players in the sector:

Earnings in Focus

U.S. chemical giant DowDuPont DWDP reported earnings per share of 88 cents, missing the Zacks Consensus Estimate by a penny but improving 6% from the year-ago quarter. Revenues were flat year over year at $20.1 billion but fell short of the estimated $20.1 billion.

PPG Industries PPG topped earnings estimates but lagged on revenues. Earnings per share of $1.15 came ahead of the Zacks Consensus Estimate of $1.09, while revenues of $3.64 billion were slightly below the estimated $3.65 billion. On a year-over year basis, earnings were up 73%, while revenues dipped 1% (see: all the Materials ETFs here).

Industrial gas giant Air Products & Chemicals APD lagged on both fronts. Earnings per share were below the Zacks Consensus Estimate by a penny and revenues fell shy by $65 million. Earnings were up 4% while revenues came on par with the year-ago quarter.

Chemical maker LyondellBasell Industries LYB came up with earnings of $1.83 per share, trailing the Zacks Consensus Estimate of $2.13. Revenues of $8.9 billion also lagged the estimated $9.22 billion and fell 2.8% year over year.  

ETFs in Focus

Given a string of downbeat results, the material sector is down 1.8% (aggregate one-day stock market reaction to earnings releases) in response to earnings announcements. However, it was unable to take the sheen away from material ETFs that are up nearly 1% over the past week. Below we have highlighted those ETFs that have the top 10 holdings in these chemical titans. All these have a Zacks ETF Rank #3 (Hold), suggesting potential upside in the coming weeks (read: Wall Street Caps Best Month in Decades: 6 Top Leveraged ETFs).

iShares U.S. Basic Materials ETF IYM

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 48 stocks in its basket. It has AUM of $430 million and charges 43 bps in fees and expenses. Volume is good as it exchanges around 93,000 shares a day. DowDuPont accounts for 20.2%, while other in-focus firms collectively make up for 14.8% of the assets. The product is heavily skewed toward specialty chemical and diversified chemical with around one-fourth of the portfolio each, while industrial gases, steel and commodity chemicals round off the top five.

Materials Select Sector SPDR XLB

The most popular material ETF follows the Materials Select Sector Index. This fund manages about $3.9 billion in its asset base and trades in volumes as heavy as around 8.7 million. The ETF charges 13 bps in fees per year from investors. In total, the fund holds about 25 securities in its basket with DowDuPont making up for 20.3% of assets and the other in-focus three firms accounting for 14.7% share. In terms of industrial exposure, chemicals dominates the portfolio with three-fourths share, while containers & packaging, and metals & mining round off the top three positions.

Vanguard Materials ETF VAW

This fund has amassed about $1.9 billion in its asset base and offers exposure to 117 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.10% in expense ratio, while volume is good at 173,000 shares. Here, DWDP holds 16.3% of assets while the other in-focus firms make up for a combined 11.5% share in the basket. Specialty chemicals, diversified chemical and industrial gases take the largest share at 24.1%,18.8% and 15.9%, respectively, while others offer single-digit exposure each (read: 4 Market-Beating Sector ETFs of January).

Fidelity MSCI Materials Index ETF FMAT

This fund provides exposure to 117 materials stocks with AUM of $168.3 million. This is done by tracking the MSCI USA IMI Materials Index. DowDuPont makes up for 15.1% of assets while the other in-focus firms account for a combined 12.3% share. Chemicals accounts for 67.6%, while container & packaging, and metals & mining round off the next two spots with a double-digit exposure each. The ETF has 0.08% in expense ratio while volume is moderate at around 66,000 shares a day.

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