The broad market has been seeing rough trading over the past few days as stretched valuations and earnings warnings dampened investor mood.
The earnings season commenced with apprehensive investors predicting that most of the sectors will falter on earnings growth. This is especially true given that the earnings for the S&P 500 are projected to be down 4.0% year over year on 1.3% higher revenues and modestly lower margins, as per the Zacks Earnings Trends.
Earnings estimates have fallen sharply over the past three months from 2.1% growth projected in January. The weakness is broad based with 10 of the 16 Zacks sectors expected to show earnings decline. Among the major sectors, finance, technology, energy, medical and basic materials will likely suffer the most.
The culprits are mostly large scale, including soft global economic fundamentals such as escalating tensions in Russia, prospect of interest rate hike sooner than expected in the U.S., persistently low inflation in developed economies and higher borrowing cost in emerging markets.
Given this uncertain environment, investors seeking to protect themselves from downside risks should invest in baskets of stocks with solid value fundamentals. This could be easily done by looking into bargain ETFs, which offer lower risk compared to selecting individual stock (read: Two Buy Ranked Value ETFs for a Shaky Market).
For those investors, we have found some bargain ETFs that have Price/Trailing Earnings ratio of less than 15, Price/Book Value ratio of less than 1.5 and expense ratio of less than 0.50% with the help of fidelity.com screener. These funds also have top Zacks Rank of ‘1’ or ‘2’, suggesting outperformance in the coming months.
Below, we have highlighted three such funds that have the potential to move higher than the others heading into this earnings season:
RevenueShares Financial Sector Fund (RWW)
This product targets the broader U.S. financial sector and follows RevenueShares Financial Sector Index. It offers exposure to about 81 stocks that are weighted by revenues instead of market capitalization. Berkshire Hathaway occupies the top position at 13.34% in the basket while other firms hold less than 7.26% (read: Forget Cap Weighted ETFs and Buy These Funds Instead).
In terms of industrial exposure, bank and insurance make up for the top two sectors at 33% and 31%, respectively, while financials services, investment companies and asset management round off to the top five. The fund is unpopular and illiquid with AUM of nearly $31 million and average daily volume of 4,000 shares. Expense ratio came in at 0.49%.
The fund is trading at P/E of 13.54 and P/B of 1.15 and lost over 1% so far this year. The ETF has a Zacks ETF Rank of ‘1’ or ‘Strong Buy’ with a ‘High’ risk outlook.
iShares U.S. Insurance ETF (IAK)
This ETF provides exposure to the insurance segment of the broader U.S. financial sector by tracking the Dow Jones U.S. Select Insurance Index. With AUM of $147.7 million, the fund holds 66 securities in its basket and charges 46 bps in annual fees from investors. Volume is light though, trading in just 29,000 shares a day.
The product is heavily concentrated on the top two firms – American International (AIG) and Metlife (MET) – with combined 21.71% share. Other firms do not hold more than 6.40% of assets. Within the insurance sector, property and casualty insurance takes the top spot, accounting for half of the asset base while life insurance and full time insurance take the remaining portion (read: Should You Buy Insurance ETFs Now?).
IAK has P/E and P/B ratio of 11.45 and 1.07, respectively and is down nearly 4% in the year-to-date time frame. The ETF has a Zacks ETF Rank of ‘1’ or ‘Strong Buy’ with a ‘Medium’ risk outlook.
Schwab Fundamental International Large Company Index ETF (FNDF)
For investors looking for international exposure could find FNDF an exciting pick. This fund follows the Russell Fundamental Developed ex-U.S. Large Company Index and offers exposure to international large companies using three fundamental measures – retained operating cash flow, adjusted sales, and dividends and buybacks. The fund has P/E ratio of 14.72 and P/B ratio of 1.32, indicating lower valuation.
Holdings 785 securities in its basket, the fund is widely spread out across each sector and security. None of the securities holds more than 2.4% of assets. Financials, energy, industrials and consumer discretionary occupy the top four positions in terms of sector with double-digit allocation. From a country look, United Kingdom takes the top spot at 20.5%, closely followed by Japan (18.4%) and France (11.6%) (see: all the Developed World ETFs here).
The fund has amassed $81.6 million in its asset base while trades in small volume of less than 35,000 shares per day. It charges 32 bps in annual fees from investors. The ETF has added 2% in the year-to-date time frame and has a Zacks ETF Rank of 2 or ‘Buy’ with a ‘Medium’ risk outlook.
Amid financial volatility as well as shaky global fundamentals, investors are shifting from high growth to lower valuation stocks, which have upside potential in the coming days. Given this, the above-mentioned products look compelling choices for investors as the trio seems undervalued than the overall market at current levels.
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Read the analyst report on FNDF
Read the analyst report on IAK
Read the analyst report on RWW
Read the analyst report on AIG
Read the analyst report on MET
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