2 ETFs Rising to Rank #1 This Earnings Season

Global growth worries and the uncertain timing of the interest rates hike in the U.S. have long trapped the broader stock market in a nasty web of trading. The major culprit, China, has spread fears of global repercussions.

The sluggishness in other developed and developing economies, lower oil prices, strong dollar, and a slump in commodities further added to the financial market instability. Now with the Q3 earnings season having kicked in, investors remained wary of the impact of these issues on the earnings picture (read: 4 Sector ETFs Standing Tall in Current Turmoil).

As per the Zacks Earnings Trends, Q3 earnings from all the S&P 500 members are expected to decline 5.6% on an annual basis on 5.5% lower revenues. According to Thomson Reuters, S&P 500 companies are expected to report a 4.2% drop in earnings that would be the biggest decline in six years. Despite weak corporate earnings and huge levels of stock market volatility, many investors still want to bet on an improving U.S. economy, which is backed by a healing job market and increasing consumer confidence.

For these investors, we have looked into the Zacks ETF Rank to find the best picks. The system takes into account factors such as industry outlook and expert surveys; and then applies ETF-specific factors (like expense ratios and bid/ask spreads) to spot the best funds in each sector. Using this system, we have found a handful of ETFs that have earned a Zacks ETF Rank #1 (Strong Buy) in the latest ratings update, and could thus outperform (see: Our Zacks ETF Rank Guide).

In fact, a couple of funds have seen their Ranks surging to the top hierarchy from #3 (Hold) and could be great picks in the coming months.

iShares U.S. Medical Devices ETF (IHI)

The twin attacks of the recent global market rout and Hillary Clinton’s tweet took away the sheen away from the broad healthcare sector. While biotech stocks were hit hard, the medical device corner showed stability even amid turbulence. This is primarily thanks to solid industry fundamentals, including rising mergers & acquisitions, emerging market expansion, positive demographic trends and innovation of new products.

Further, all the four industries under the MedTech umbrella have a strong Zacks Rank in the top 35%, suggesting healthy growth. Given this, the medical device ETF looks like an intriguing pick heading into the earnings season. The fund provides exposure to U.S. companies that manufacture and distribute medical devices by tracking the Dow Jones U.S. Select Medical Equipment Index (read: Ill at Ease with Biotech? Prescribing #1 Healthcare ETFs).

In total, the fund holds 51 securities in its basket with double-digit allocation to the top two firms – Medtronic (MDT) and Abbott Laboratories (ABT). Other firms do not hold more than 8.73% of assets. In terms of industrial exposure, medical equipment accounts for over 86% share while life science tools & services takes the remainder. IHI has managed assets worth $689 million while charging 43 bps in fees per year. Volume is moderate as it exchanges about 83,000 shares in hand per day. The fund was down 6.2% over the past three months.

PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ)

The consumer discretionary sector is expected to gain the most in Q4, especially given the higher spending power and the fervor of the upcoming holiday shopping season. Cheap fuel and rising income are leading to fatty wallets, which along with an improving U.S. economy, better job prospects and increasing consumer confidence is making the consumer segment a great space to stay invested in.

While there is a few options available in this space with a Zacks Rank #1, PEZ gathered maximum attention as it has seen its Rank surging by two notches. This fund follows the DWA Consumer Cyclicals Technical Leaders Index and provides exposure to 38 consumer stocks having positive relative strength (momentum) characteristics. It is slightly skewed toward the top firm – O'Reilly Automotive (ORLY) – at 5.2%, while other securities have a spread-out exposure, with each holding less than 4% share (see: all the Consumer discretionary ETFs here).
 
About 29% of the portfolio is dominated by specialty retail while hotel restaurants and leisure, textiles apparel and luxury goods, and airlines round off the next three positions with double-digit exposure each. PEZ is less popular and less liquid in the consumer discretionary space with AUM of $180 million and average daily volume of 39,000 shares. The expense ratio came in at 0.60%. The product lost 2.5% in the trailing three-month period.

Bottom Line

These sector ETFs could be the fall season winners and investors should definitely look at them or the other funds in the sector that have recently seen their Zacks Rank surging to #1.

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ISHARS-US MED D (IHI): ETF Research Reports
 
PWRSH-DW CON CY (PEZ): ETF Research Reports
 
MEDTRONIC (MDT): Free Stock Analysis Report
 
ABBOTT LABS (ABT): Free Stock Analysis Report
 
O REILLY AUTO (ORLY): Free Stock Analysis Report
 
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