3 industrial ETFs to watch

With giants like GE and Caterpillar ready to report earnings, these funds offer investors a range of aggressive and conservative plays in the sector.

By TheStreet Staff Jul 20, 2011 10:27AM

Image: Industrial (© Kevin Burke/Corbis)By Don Dion, TheStreet

 

In the same way the financial sector dominated earnings-related headlines last week, during the latter half of this week, industrials will be front and center as leading companies like General Electric (GE) and Caterpillar (CAT) report their quarterly performances and updated outlooks.

 

The market's multi-week spurt of rocky action has pressured emotions recently. However, breakout numbers from these giants of industry would be a welcome dose of confidence for wearied and doubtful global investors.

 

ETF investors have a range of options to tap into this corner of the market. As companies step up and provide insight into the future, it may be worth putting some of these products on the watch list.

 

Heading into the latter half of the week, analyst sentiment toward industrials appears largely mixed. While some fear the macro issues facing developed regions have and will continue to weigh on the performance of this sector, others are less concerned about the industry's prospects.

 

In a recent Reuters article, GE CEO Jeff Immelt summed up the atmosphere, saying, "Demand is tremendous . . . yet at the same time there's more discontent."

The companies found listed in this week's earnings calendar hail from across the industrial sector. The lineup includes broad-based conglomerates like GE, railroad company Union Pacific (UNP) and aerospace titan United Technologies (UTX). Given this diverse array, there are a range of trading products investors can choose from.

 

For instance, investors looking to target Union Pacific may be best off opting for the iShares Dow Jones Transportation Average Index Fund (IYT). UNP is the fund's largest holding, accounting for more than 10% of its portfolio. Heading into UNP's earnings, IYT is already riding high. In late June, the fund's second-largest component, FedEx (FDX), stole headlines after announcing strong numbers and laying out a rosy growth picture for the latter half of the year.

 

It will be interesting to see whether UNP's report offers much of the same.

 

United Technologies kicked off earnings in the aerospace and defense subsector Wednesday, reporting better-than-expected profits and improved full-year guidance prior to the market's open. Later on in the week, fellow industry players including Rockwell Collins (COL) and Goodrich (GR) will follow suit with their own forecasts for the second half of the year.


The iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA) is the strongest option for investors looking to target this slice of the industrials sector. In total, the three companies highlighted above account for nearly a fifth of the fund's assets.

 

Although strong earnings from industry leaders will bode well for ITA's prospects, it is important to keep a close watch on the big-picture issues that threaten to constrain the fund's potential. I talk more about those challenges in this video.

 

IYT and IAT will be exciting to watch as earnings play out. However, for conservative investors, the best way to gain long-term access to this corner of the market would be through a product like Industrial Select Sector SPDR (XLI).

 

Whereas the two funds highlighted above expose investors to individual corners of the industrial sector, XLI casts a wider net, combining many of the same companies and placing them under one roof. In fact, all of the companies highlighted above can be found within XLI's index.

 

This broad exposure makes XLI not only a strong play on this week's earnings schedule but a suitable long-term play on the economic recovery.

The outlook for industrials heading into earnings is choppy, and therefore investors with a weak stomach for risk may want to hold off jumping into any of these funds until initial reactions have passed.

 

For short-term, aggressive investors, products like XLI, IYT and ITA can be attractive plays on a busy earnings calendar. Conservative investors looking to construct a long-term portfolio, on the other hand, may want to use XLI as a small play on the broader economic recovery.

 

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