Tuesday’s ETF To Watch: Materials SPDR (XLB)

by on October 26, 2010 | ETFs Mentioned:

Over the past quarter, equity markets have soared despite low levels of economic growth in much of the developed world. Two of the biggest gainers during this time period have been the materials and commodity sectors, which have jumped due to a weak dollar and prospects of further shrinking in the greenback thanks to expectations of the Federal Reserve’s QE2 program. Due to this increased demand and a weak dollar, many materials companies have surged to new highs, one of the biggest and most famous of these companies is E.I. du Pont de Nemours & Co. (DD), which is among the world leaders in chemical production. DD is the second largest chemical firm by market cap at over $43 billion and is currently a member of the DJIA. Due to the massive size of the firm and its representation on one of the world’s most famous indexes, the company always weighs heavily on the markets when it gives its earnings report.

This looks to be the case again today as DD reports its third quarter 2010 earnings before the bell. The company is projected to post earnings of $0.34 a share and $6.76 billion in revenues which represents a sharp decrease from last years earnings which came in at 45 cents a share.“The improving global economy is boosting demand for the company’s products, including paint and plastic for the auto market and materials to build solar panels,” writes Ernest Scheyder. “However, quarterly profit could be dented by DuPont’s aggressive spending on research in its agricultural unit to compete with rival Monsanto Co.” Nevertheless, DD has seen its shares surge by close to 39% year-to-date and with the company hitting its 52 week high in terms of stock price the company could be in for a sharp drop if it fails to meet expectations which would likely spur investors to lock in some of their profits and sell off shares of the company [use our ETF Stock Exposure Tool to find out which ETFs offer exposure to your favorite companies].

With this earnings report ahead, the Materials Select Sector SPDR (XLB), which holds 10.8% in DD, should be active in Tuesday trading. The fund tracks the Materials Select Sector Index which includes companies from the following industries: chemicals; metals & mining; paper & forest products; containers & packaging; and construction materials. In addition to the top weighting to E.I. du Pont de Nemours, Freeport-McMoRan, Dow Chemical, and Newmont Mining Corp also take up large chunks of the fund. Over the past month the fund has gained 5% and with a solid earnings report investors should look for this short-term outperformance to continue [also see Low Cost ETFs: The Complete List Of The Cheapest Exchange-Traded Funds].

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Disclosure: No positions at time of writing, photo is courtesy of Mytho88.