Industrial ETFs In Focus On GE Mixed Q4 Results

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Includes: FIDU, GE, IYJ, VIS, XLI
by: Zacks Funds

On Friday, General Electric (NYSE:GE), the industrial conglomerate giant, reported better-than-expected fourth-quarter 2015 earnings but missed on the top line. Earnings per share came in 52 cents, a couple of cents ahead of the Zacks Consensus Estimate and up 27% from the year-ago quarter.

Revenues rose 1.4% year over year to $33.89 billion but were well below our estimated $35.92 billion. The revenue miss were credited to a weak global economy and an oil price slide that hurt revenues in the renewable, and oil and gas segments (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs).

In order to withstand the fall oil prices and slow global growth, General Electric doubled its restructuring spending for this year to $3.4 billion and increased its cost-cutting target by two times for the struggling oil and gas business to as much as $800 million. Further, the company is transforming itself into a digital-industrial company and plans to shift its headquarters from Connecticut to Boston by 2018. Notably, digital business revenue climbed 22% to $5 billion last year and is on track to reach $20 billion by 2020.

For fiscal 2016, the company reaffirmed its earnings per share guidance of $1.45-$1.55, the midpoint of which is a penny below the Zacks Consensus Estimate. Organic revenue is expected to grow 2-4% while cash generation is estimated at $30-$32 billion. General Electric also intends to return $26 billion to its shareholders this year, including $8 billion in dividends and $18 billion in share repurchases.

Market Impact

Following mixed Q4 results, shares of GE dropped as much as 3.1% in Friday's trading session and the industrial ETFs having double-digit allocation to this industrial conglomerate giant are in focus for the days ahead. All the funds stated below have a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook.

Fidelity MSCI Industrials Index ETF (NYSEARCA:FIDU)

This fund tracks the MSCI USA IMI Industrials Index, holding 345 stocks in its basket. General Electric takes the top spot at 13.3% share with the aerospace and defense industry making up for one-fourth of the portfolio, followed by industrial conglomerates at 21.3%. The product has amassed $100.5 million in its asset base while trades in moderate volume of nearly 102,000 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 gained 0.8% following GE results.

Industrial Select Sector SPDR ETF (NYSEARCA:XLI)

This is the largest and most popular ETF in the space with AUM of $5.3 billion and average daily volume of 13.7 million shares. It follows the Industrial Select Sector Index and charges 14 bps in fees per year. Holding a small basket of 68 securities, GE takes the top spot with 11.9% allocation. Form a sector look, aerospace and defense occupy the top position at 28.3% followed by industrial conglomerates (21.5%), and machinery (12.8%). The fund added 0.9% on the day.

Vanguard Industrials ETF (NYSEARCA:VIS)

This fund follows the MSCI US IMI Industrials 25/50 index and holds about 346 securities in its basket. Of these firms, GE occupies the top position with 12.6% allocation. Here again, aerospace and defense takes the top spot at 23.8% followed by industrial conglomerates at 20.2%. The fund manages $1.8 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as it exchanges 121,000 shares a day on average. The product gained 1.1% on the day (read: Beat U.S. Manufacturing Woes with These Industrial ETFs).

iShares U.S. Industrials ETF (NYSEARCA:IYJ)

This product provides exposure to 212 industrial stocks by tracking the Dow Jones U.S. Industrials Index. It is heavily concentrated on GE - the top firm - with 11.5% of assets while others make up for less than 4% share. Further, the ETF is tilted toward capital goods' companies at 59.4% while transportation and software services round off the next two spots with double-digit exposure. The fund has an AUM of $507 million and average daily volume of 68,000 shares. Expense ratio came in at 0.44%. The product has gained nearly 1.2% following GE results.

Bottom Line

Investors should note that the decline in the GE share price has not affected these ETFs despite its 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 the industry's biggest components. Further, the gains in these industrial ETFs are the result of a broad stock market rally buoyed by the sudden spike in oil price, and stimulus hopes in Europe and Japan.

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