Material ETFs In Focus As Dollar Hits DuPont, Dow Chemical Q4

We are in the middle of the earnings season, and the materials sector is seemingly tempering the overall Q4 growth picture after energy and autos. This is especially true as total earnings from 69.7% of the sector’s total market capitalization reported so far are down 0.6% on 1.7% revenue decline.

Despite the improving performance in the chemicals and steel industries as well as operating efficiencies, the sector has hit hard by a strong dollar that has weighed on revenue. Both Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD) missed on revenue estimates. While the former beat on earnings, the latter met our estimate.

DOW Earnings in Focus

Earnings per share came in at 85 cents, crushing the Zacks Consensus Estimate of 68 cents and improving from 65 cents earned a year ago. Revenues were flat year over year at $14.38 billion and below our estimate of $14.41 billion.

While the company saw robust growth in agricultural science business and ongoing productivity improvements in materials and chemicals, these were offset by the price declines in Western Europe due to a strong dollar. Notably, sales for crop protection jumped 23% year over year driven by strong demand for its insecticides, especially Spinetoram and Isoclast.

The largest U.S. chemical maker remained committed to cost reduction and efficiency programs that will likely boost margins in the coming quarters. The company has been focusing on high growth and profitable businesses such as packaging, electronics and agriculture, and are divesting low-margin and underperforming assets. It plans to raise $7.5 billion to $8 billion from assets sales by year-end 2016.

Impressed by a solid earnings beat, shares of Dow Chemical had risen 5.1% to date post its earnings announcement on January 29.

DD Earnings in Focus

The world's second-largest seed maker reported earnings per share of 71 cents, on par with the Zacks Consensus Estimate and 20.3% higher than the year-ago earnings of 59 cents. Strong year-over-year performance was credited to strategic measures including portfolio optimization, productivity improvements, and cost-savings from operational redesign initiatives.

Total revenue slipped 5% year-over-year to $7.38 billion and fell short of our $7.82 billion estimate owing to currency headwinds.

As currency headwinds are expected to hurt earnings by 60 cents per share in 2015, DuPont expects a bottom line in the range of $4.00–$4.20 for this year. The guidance was well below the Zacks Consensus Estimate of $4.51 at the time of announcement.

Further, the leading U.S. chemical maker is confident of its ability to deliver strongly. This is especially true as the company raised its cost reduction target by $300 million to $1.3 billion annually by 2017. Further, it is seeking to cut $1 billion in annual costs by the end of 2015, well ahead of its original schedule of 2019. In an effort to reduce expenses, the company is spinning off its chemicals business, which is expected to be completed by mid 2015.

Following the earnings announcement on January 27, DD shares have fallen 3.5% over the past four days.

ETFs in Focus

The mixed stock performance of the two chemical titans has put materials ETFs in focus for the coming days. Below, we have highlighted three ETFs that are heavily invested in these chemical giants and have been modestly down over 1% in the past one week.

Materials Select Sector SPDR (ARCA:XLB)

The most popular materials ETF, XLB follows the S&P Materials Select Sector Index. This fund manages about $2.9 billion in its asset base and trades in heavy volume of nearly 6.6 million. The ETF charges 16 bps in fees per year from investors. In total, the fund holds about 31 securities in its basket. Of these firms, DD takes the top spot at 11.35% while DOW accounts for the third position with 8.80% allocation. In terms of industrial exposure, chemicals dominate about three-fourths of the portfolio while metals & mining and containers & packaging round off the top three.

iShares U.S. Basic Materials ETF (NYSE:IYM)

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 56 stocks in its basket. The fund has AUM of nearly $504 million and charges 43 bps in fees and expense. Volume is good as it exchanges around 257,000 shares in hand a day. DD and DOW occupy the top and third positions in the basket with 10.74% and 8.13% of assets, respectively. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio. Industrial metals and mining, and forestry and paper take the remaining portion in the basket.

Vanguard Materials ETF (NYSE:VAW)

This fund has amassed about $1.2 billion in its asset base and offers exposure to 128 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio while volume is moderate at 118,000 shares. Here again, DD and DOW are the top and third firms accounting for 8.3% and 6.7% share, respectively. Chemicals make up for nearly 69% of assets while container & packaging and steel also make a nice mix in the portfolio.

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