We are in the middle of the earnings season, and the materials sector is seemingly tempering the overall Q3 growth picture after energy. This is especially true as total earnings from 60.9% of the sector’s total market capitalization reported so far are down 26.8% on 21% revenue decline.

Despite the earnings weakness, the sector is showing impressive performance, having gained an average 1.76% (average price difference between a day before and after the earnings announcement of a stock), per the Zacks Earnings Trend. In particular, Dow Chemical (DOW - Analyst Report) and DuPont (DD - Analyst Report) led the rally in the sector as both companies beat on their earnings. However, revenues remained weak and missed our estimates.  

DOW Earnings in Focus

The largest U.S. chemical maker continued its streak of earnings beat for the eight consecutive quarter. Earnings per share came in at 82 cents, easily trumping the Zacks Consensus Estimate of 68 cents and improving from 72 cents earned a year ago. Healthy earnings were credited to the incredible performance by the Performance Plastics segment due to lower cost of raw materials like oil and natural gas (read: 5 Ways to Play the Oil Rebound with ETFs).

Revenues dropped 16% year over year to $12.04 billion and missed our estimate of $12.25 billion. EBITDA margin expanded 370 bps to 20%, representing the best third-quarter margin since 2005 even as a strong dollar took a toll on revenues.

The company remained committed to cost reduction and efficiency programs that are likely to boost margins and shareholders returns in the coming quarters. It is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets such as construction, packaging and automotive.

Dow Chemical raised its quarterly dividend by 10% to 46 cents, taking the annualized dividend to $1.84 per share, which is the highest in the company’s history. This new dividend is payable on January 29 to shareholders of record on December 31.

Driven by a solid earnings beat, shares of Dow Chemical has risen 8.2% to date post its earnings announcement on October 22.

DD Earnings in Focus

While DuPont crushed our earnings estimate due to cost reductions initiatives, revenues and profits tumbled on a strong dollar, a soft agriculture business and weakness in emerging markets (read: 3 Sector ETFs Hit Hard by the Market Sell-off).

The world's second-largest seed maker reported earnings per share of 13 cents, which beat the Zacks Consensus Estimate by 3 cents but deteriorated from 39 cents from the year-ago quarter. Total revenue slipped 17% year over year to $4.9 billion and fell short of our $5.2 billion estimate.

Cost reductions from operational redesign contributed 10 cents to third-quarter earnings and are expected to add 40 cents per share to the full–year bottom line. The action will further save $1.3 billion in annual costs by 2016, a year ahead of the earlier expectation, and an additional $1.6 billion by 2017 end. With its cost-cutting initiatives, the chemicals and seed producer maintained its 2015 earnings per share guidance of roughly $2.75, which was below the Zacks Consensus Estimate of $2.93 at the time of earnings release. It expects currency headwinds to dilute full-year earnings by 72 cents per share.

Following the earnings announcement on October 27, DD shares climbed nearly 5% over the past two days.

ETFs in Focus

Solid price performance of these two chemical titans has led to a rally in material ETFs that are heavily invested in these two stocks. Though these funds have an unfavorable Zacks ETF Rank of 4 or’ Sell’ rating, they have gained over 3.5% in the past five days and are on investors’ radar for the weeks ahead (see: all the Materials ETFs here):

Materials Select Sector SPDR (XLB - ETF report)

The most popular material ETF follows the Materials Select Sector Index. This fund manages about $2.1 billion in its asset base and trades in heavy volume of around 6.1 million. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 30 securities in its basket with DOW and DD taking the top two spots, with nearly 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with three-fourth share while metals & mining and containers & packaging round off the top three positions.

iShares U.S. Basic Materials ETF (IYM - ETF report)

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 54 stocks in its basket. The fund has AUM of $361 million and charges 43 bps in fees and expenses. Volume is good as it exchanges around 106,000 shares in hand a day. DOW and DD occupy the top two positions in the basket, with over 10% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio while steel, forestry & paper, metals & mining receive minor allocations (read: Material ETF (IYM - ETF report) Hits 52-Week Low).

Vanguard Materials ETF (VAW)

This fund has amassed about $1 billion in its asset base and offers exposure to 121 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio while volume is moderate at 75,000 shares. Here, DOW and DD are the top two firms accounting for nearly 6% share each. Chemicals make up for nearly 70% of assets while container & packaging and steel also make a nice mix in the portfolio.

Fidelity MSCI Materials Index ETF (FMAT)

This fund provides exposure to 122 materials stocks with AUM of $51.1 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, DOW and DD are the top two firms with nearly 8% allocation. Chemicals accounts for 69.7% share while container & packaging, and metals & mining round off the top three spots with double-digit exposure each. The ETF has 0.12% in expense ratio while volume is moderate at 80,000 shares a day (read: Will Gold Miners ETFs Turn Around in Q4?).