FIDU: Industrial Dashboard for April (NYSEARCA: FIDU)

This series of monthly articles presents a dashboard with aggregate measures of subsectors across industries. It is also a top-down analysis of sector ETFs such as the Industrial Select Sector SPDR (XLI) ETF and Fidelity MSCI Industries Index ETF (NYSEARCA:FIDU), whose largest holdings are used to calculate these parameters.

Shortcut

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

Basic Metrics

I calculate the median value of five fundamental ratios for each subsector: Return on Earnings (“EY”), Return on Sales (“SY”), Return on Free Cash Flow (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the US stock market. The five basic measures are calculated over the last 12 months. For everyone, the higher, the better. EY, SY and FY are the medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price/something ratios, which are unusable or unavailable when the “something” is close to zero or negative (e.g. companies with negative earnings). I also look at two momentum indicators for each group: median monthly return (RetM) and median annual return (RetY).

I prefer medians to means because a median divides a set into a good half and a bad half. A capital-weighted average is skewed by extreme values ​​and larger 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 denoted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as averages over a retrospective 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 businesses. 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). Similarly, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

Scores are in percentage points. VS can be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation should be taken with caution: the baseline is an arbitrary reference and not an assumed fair value. The formula assumes that the three evaluation measures are equally important.

Current data

The following table shows last week’s closing metrics and scores. The columns represent all the data named and defined above.

	VS	QS	EY	SY	AF	DEER	GM	EYh	SYh	FYh	ROeh	GMH	RetM	RetY
Aeronautics+Defense	-25.81	-10:20 a.m.	0.0477	0.5296	0.0301	6:47 p.m.	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	1:37 p.m.	-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 following graph plots the value and quality scores by subsectors (higher is better).

Evolution since last month

Since last month, value scores have deteriorated in all sub-sectors, mainly in services/retail.

Momentum

The following chart plots momentum data.

Interpretation

The transportation industry is undervalued by about 13% compared to 11-year averages. However, its quality score is below the baseline. The other sub-sectors are 25-46% overvalued relative to historical averages. It can be partly justified by a very good quality score for the building/construction/equipment sub-sector, and to a lesser extent for services and distribution. Aerospace/Defense is the least attractive sub-sector on my metrics, with value and quality scores significantly below baseline.

Fast facts on FIDU

The Fidelity MSCI Industrials Index ETF (FIDU) has tracked 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%).

At the time of writing, the fund holds 366 shares. The following table shows the top 10 holdings with their valuation ratios and dividend yields. Their overall weight is 32%.

Teleprinter	name	Mass	EPS growth %TTM	P/E TTM	P/E front	Yield%
UNP	Union Pacific Corp.	4.14%	26.53	24.55	9:00 p.m.	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
OF	DEERE & COMPANY	3.25%	64.95	23.69	18.79	0.98
CAT	Caterpillar Inc.	3.08%	116.76	6:43 p.m.	17.89	2.03
LMT	Lockheed Martin Corporation	3.05%	-6:30 a.m.	20.61	17.75	2.39
GE	General electric company	2.60%	-124.73	N / A	28.00	0.35
BA	Boeing Company	2.59%	65.65	N / A	62.75	0
MMM	3M Co	2.25%	9.37	2:70 p.m.	2:43 p.m.	4.01

FIDU and XLI have very similar performance and risk measures since the creation of FIDU (see following table). The difference in annualized return is only 46 basis points, the maximum drawdown and volatility are almost identical.

	Full return	Annual return	Sample	Sharp	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 looking for capital-weighted exposure in industrials. It has significantly more holdings than XLI (366 vs. 75), but it hasn’t made 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 around 4%, so the risk associated with individual stocks is quite low. Investors wanting a lower maximum weighting may prefer the Invesco S&P 500® Equal Weight Industrials (RGI) ETF, whose largest holdings weigh around 2% of asset value. FIDU and XLI are similar for buy-and-hold investors. However, XLI has much higher liquidity, making it a better choice for trading and tactical allocation.

Dashboard list

I use the first table to calculate the value and quality scores. It can also be used in a stock selection process to check the standing of companies against their peers. For example, the EY column tells us that a transportation company with an earnings yield greater than 0.0441 (or price/earnings less than 22.68) is in the better half of the subsector with respect to This measure. A list of scorecards is sent monthly to Quantitative Risk & Value subscribers with the most profitable companies ranking in the top half among their peers on all three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on the data available at that time.

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

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