Industrial-sector exchange traded funds may take an indirect hit from the depressed oil prices as energy producers are forced to cut back on planned projects and spending for manufactured goods.
For instance, the Industrial Select Sector SPDR (NYSEArca: XLI) holds large industrial companies with significant exposure to the oil services industry, such as General Electric Company (NYSE: GE) 9.5%, United Technologies Corporation (NYSE: UTX) 5.1% and Caterpillar (NYSE: CAT) 3.0%, among others. [A Bleak Outlook for Energy, Industrial ETFs]
Caterpillar’s Chairman and Chief Executive Officer Doug Oberhelman warns that slowing sales of compressors, pumps and gas turbines due to reduced spending in the energy sector will weigh on the company in early 2015, reports Shruti Date Singh for Bloomberg.
“The bottom line is, it’s a new risk for Caterpillar’s earnings outlook for 2015,” Matt Arnold, an analyst for Edward Jones & Co., said in the Bloomberg article.
United Technologies Corporation also operates Hamilton Sundstrand, which mainly produces industrial products, such as air compressors, metering pumps and heavy duty process pumps that serve industries involved with oil and gas production, among others.
J.P. Morgan analysts have also warned of a big risk to industrial companies with exposure to oil drilling, reports Ben Levisohn for Barron’s.
Specifically, since the energy sector has heavily ramped up its capital expenditures over the past decade, there will be a lot of excess during a time when oil prices are depressed.
“We don’t think the excess gets washed out in the near term,” J.P. Morgan’s C. Stephen Tusa, Jr and Rajat Gupta said in a research note. “We are cutting numbers across the board, downgrading Dover (NYSE: DOV) to Underweight, reaffirming our Underweight on Rockwell Automation (NYSE: ROK), and continue to avoid Emerson Electric (NYSE: EMR), General Electric and SPX Corp. (SPW) as others with exposure.”
Looking at XLI, the ETF also includes DOV 0.7%, ROK 1.0% and EMR 2.3%.
Industrial Select Sector SPDR
For more information on the industrials sector, visit our industrials category.
Max Chen contributed to this article.