ETF Of The Day: Industrial Select Sector SPDR

Published on Wednesday, 18 January 2012 15:19 Written by Todd Shriber

New York, January 18^th (TradersHuddle.com) – Looking at the earnings calendar, it’s easy to get wrapped up in the notion that it’s all financials all the time. For a couple of days this week, that is the case, but over the next week some of the largest industrial companies names step up to the earnings plate. That roster includes several Dow Jones Industrial Average components making the Industrial Select Sector SPDR (NYSE: XLI) an ideal choice as today’s ETF of the day.

The Industrial Select Sector SPDR, which is home to 60 stocks, is the largest industrials ETF by assets with almost $3.6 billion in AUM as of January 17. An expense ratio of 0.2% means the ETF is also one of the cheaper funds in this ETF genre, making it a worthy choice for investors with longer time horizons. However, it should be noted that XLI is NOT a Dow tracking ETF.

In fact, of the ETF’s 60 holdings, only five are Dow constituents. Speaking of XLI’s lineup, Union Pacifc (NYSE: UNP), the ETF’s seventh-largest holding, reports earnings on Thursday. General Electric (NYSE: GE), XLI’s biggest holding, steps into the earnings confessional on Friday. Combined, those two stocks represent more than 15% of XLI’s weight.

And if that’s not enough to move XLI this week, the ETF will certainly be in play next week as Dow components United Technologies (NYSE: UTX), Caterpillar (NYSE: CAT), 3M (NYSE: MMM) and Boeing all deliver results. Those are all top-10 holdings in XLI and that quartet combines for nearly 20% of the ETF’s weight.

Beyond Boeing, XLI is also home to major defense names such as General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT) and Raytheon (NYSE: RTN). In addition to Union Pacific, CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC) are found in XLI, so beyond the usual suspects, look for earnings reports from defense contractors and railroad operators to potentially move XLI.

Of note, investors have been pouring cash into XLI, fueling a rally that started in October when the ETF bounced off the $28 area. XLI, which trades more than 6% above its 200-day moving average, has gotten off to a banner start in 2012, jumping more than 5%. Stiff resistance looms in the $36.50 area, but that could easily be cracked by a combination of stellar earnings reports and bullish guidance given by XLI constituents.

While GE is the ETF’s largest holding, the Dow quartet that reports next week along with the railroad names are likely to have a more profound impact on XLI’s near-term fortunes. Stocks like Caterpillar and Union Pacific are high beta names than GE is and investors will look to these names as temperature checks on the economy at large. If the news is good, XLI probably rockets higher.