FIDU: Industrials Dashboard For April (NYSEARCA:FIDU)

This monthly article series shows a dashboard with aggregate subsector metrics in industrials. It is also a top-down analysis of sector ETFs like the Industrial Select Sector SPDR ETF (XLI) and the Fidelity MSCI Industrials Index ETF (NYSEARCA:FIDU), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each subsector: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for transportation in the table below is the 11-year average of the median Earnings Yield in transportation companies. The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data named and defined above.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
Aerospace+Defense	-25.81	-10.20	0.0477	0.5296	0.0301	18.47	19.88	0.0571	0.8207	0.0404	20.54	22.17	3.46%	19.59%
Building+Equipment	-46.36	27.08	0.0284	0.2349	0.0154	11.29	33.96	0.0427	0.8554	0.0230	9.38	25.37	-3.04%	6.12%
Machinery+Conglomerates	-24.91	8.97	0.0417	0.3475	0.0250	21.65	39.39	0.0499	0.5598	0.0314	19.13	37.59	-0.10%	-5.65%
Services+Distribution	-36.25	23.69	0.0288	0.2596	0.0211	32.03	49.87	0.0411	0.4928	0.0308	22.03	48.88	4.23%	16.55%
Transportation	13.37	-11.96	0.0441	0.8002	0.0287	26.61	15.82	0.0540	0.6962	0.0200	22.70	26.88	-0.29%	-7.06%

Value and Quality chart

The next chart plots the Value and Quality Scores by subsectors (higher is better).

Evolution since last month

Since last month, value scores have deteriorated in all subsectors, the most in services/distribution.

Momentum

The next chart plots momentum data.

Interpretation

The transportation industry is undervalued by about 13% relative to 11-year averages. However, its quality score is below the baseline. Other subsectors are overvalued by 25% to 46% relative to historical averages. It may be partly justified by a very good quality score for the building/construction/equipment subsector, and to a lesser extent for services and distribution. Aerospace/defense is the less attractive subsector regarding my metrics, with both value and quality scores significantly below the baseline.

Fast facts on FIDU

The Fidelity MSCI Industrials Index ETF (FIDU) has been tracking the MSCI US IMI Industrials 25/25 Index since 10/21/2013. It has a total expense ratio of 0.08%, cheaper than XLI (0.12%).

As of writing, the fund holds 366 stocks. The next table shows the top 10 holdings with their valuation ratios and dividend yields. Their aggregate weight is 32%.

Ticker	Name	Weight	EPS growth %TTM	P/E TTM	P/E fwd	Yield%
UNP	Union Pacific Corp	4.14%	26.53	24.55	21.00	1.93
RTX	Raytheon Technologies Corp	4.04%	207.28	40.36	21.57	1.97
UPS	United Parcel Service Inc	3.60%	793.96	12.86	14.78	3.22
HON	Honeywell International Inc	3.46%	17.85	24.63	22.58	2.01
DE	DEERE & COMPANY	3.25%	64.95	23.69	18.79	0.98
CAT	Caterpillar Inc	3.08%	116.76	18.43	17.89	2.03
LMT	Lockheed Martin Corp	3.05%	-6.30	20.61	17.75	2.39
GE	General Electric Co	2.60%	-124.73	N/A	28.00	0.35
BA	Boeing Co	2.59%	65.65	N/A	62.75	0
MMM	3M Co	2.25%	9.37	14.70	14.43	4.01

FIDU and XLI have very similar performance and risk metrics since FIDU inception (see next table). The difference in annualized return is only 46 bps, the maximum drawdown and volatility are almost identical.

	Total Return	Annual Return	Drawdown	Sharpe	Volatility
FIDU	133.72%	10.56%	-39.59%	0.63	17.73%
XLI	142.23%	11.02%	-39.66%	0.68	17.56%

Data calculated with Portfolio123

In summary, FIDU is a good product with cheap management fees for investors seeking capital-weighted exposure in industrials. It has much more holdings than XLI (366 vs. 75), but it doesn’t make a significant difference in performance between them since 2013. The heaviest industries in the fund’s equity value are machinery (19.65%) and aerospace/defense (17.34%). The heaviest holding weighs about 4%, so the risk related to individual stocks is quite low. Investors willing a lower maximum weight may prefer the Invesco S&P 500® Equal Weight Industrials ETF (RGI), whose largest holdings weighs about 2% of asset value. FIDU and XLI are similar for buy-and-hold investors. However, XLI has a much higher liquidity, making it a better choice for trading and tactical allocation.

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a transportation company with an Earnings Yield above 0.0441 (or price/earnings below 22.68) is in the better half of the subsector regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

RHI	Robert Half International Inc.
WIRE	Encore Wire Corp
MATX	Matson Inc
BLDR	Builders FirstSource Inc
ARCB	ArcBest Corp
RGR	Sturm, Ruger & Co Inc.
VNT	Vontier Corp
CARR	Carrier Global Corp
BCC	Boise Cascade Co
CMI	Cummins Inc.

It is a rotating list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.