4 Ways to Play Earnings Growth with ETFs
Q2 earnings growth has been impressive so far and is far better than recent quarters. In fact, total earnings for Q2 are on track to outpace the all-time quarterly record reached two quarters ago.
According to the Zacks Earnings Trend, total earnings for 81.9% of market cap for the S&P 500 companies are up 9.3% with a beat ratio of 66.8% while revenues increased 4.8% on revenue beat of 56.1%. Despite robust earnings, the stocks and the ETFs are seeing rough trading over the past one month due to risk-off trade.
This is because concerns over the ongoing violence in the Middle East, rising Russian sanctions, Argentina default, Portuguese banking woes, uncertainty over the timing of the Federal Reserve's rate hike and an aging bull market resurfaced lately, pushing the stocks down (read: Safe Haven ETFs to Evade Geopolitical Tensions).
In such a backdrop, many investors are seeking to tap earnings growth opportunities, setting aside the geopolitics. Further, the pace of earnings growth is expected to accelerate from 4.2% gain in the first half of this year to 7.2% in the second half and 12.3% next year.
While there are several options in the ETF world, investors should consider earnings-focused ETFs rather than market cap counterparts to play this trend. These funds include those companies that generated positive cumulative earnings over the most recent four fiscal quarters.
Why are Earnings ETFs Better?
Since earnings have been the most important drivers of stock performance over the longer period, earnings-weighted ETFs seem more compelling than the ETFs that utilize a market capitalization approach. This is especially true, as these are less volatile and may not experience as big a boom or bust as its market cap focused peers in an uncertain environment.
Earnings are the lifeblood of any business that determine the ability and soundness of the company, and its growth prospects. Earnings producing companies generally catch investors eye due to their solid financial position and growth potential, thereby leading stock prices higher.
On the other hand, market cap ETFs not only include all the profitable companies but also focus on companies that have not found a way to turn a profit and may never be able to do so. This strategy increases the risk in the portfolio and is more vulnerable to political or economic turmoil when compared to earnings-focused ETFs (see: all the total market cap ETFs here).
As a result, tilting toward this key metric is a sensible choice. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplishes this task. Below, we have highlighted the funds that could be great choices for investors seeking to make money in a rocky market while at the same time focusing on one of the most important aspects of stock investing. These products have a favorable Zacks Rank of 3 or ‘Hold’ rating.
WisdomTree Earnings 500 Fund (EPS)
This fund provides exposure to the earnings-generating companies within the large-cap segment of the broad U.S. stock market by tracking the WisdomTree Earnings 500 Index. Holding 506 stocks in its basket, the fund is well spread out across each component as none of these holds more than 4.53% share.
Additionally, the product has diverse exposure to a number of sectors with information technology, financials and consumer discretionary occupying the top three positions. The ETF has amassed $110.9 million in its asset base and charges 28 bps in annual fees. Volume is light trading in less than 6,000 shares a day. The fund is up 5.4% in the year-to-date time frame.
WisdomTree MidCap Earnings ETF (EZM)
This ETF tracks the WisdomTree MidCap Earnings Index, providing exposure to the 606 earnings generating mid cap companies. The fund is widely spread out across each component as each holds less than 1.3% of assets (read: 3 Impressive Mid Cap ETFs to Buy Now).
From a sector look, financials and industrials take the top two spots with 22.4% and 20.1% share, respectively, followed by consumer discretionary (16.8%) and information technology (12.7%). The fund charges 38 bps in fees per year while trades in average daily volume of nearly 28,000 shares. It has accumulated over $575 million in AUM and has added 2.6% so far in the year.
WisdomTree SmallCap Earnings ETF (EES)
This fund targets the small cap segment of the U.S. equity market. It follows the WisdomTree SmallCap Earnings Index and holds 874 stocks. It provides a nice balance across various securities but is slightly tilted toward financials sector at 23%. Other sectors make up for a nice mix in the portfolio.
The product has managed assets worth $435.3 million and sees light volume of 33,000 shares per day. It charges 38 bps in fees and expenses and is down 3.7% year-to-date (read: Guide to Small Cap Growth ETFs Investing).
WisdomTree Total Earnings ETF (EXT)
For a broader exposure to earnings generating stocks across market cap levels, investors should look at EXT. With AUM of $86.6 million, the fund tracks the WisdomTree Earnings Index and charges 28 bps in fees per year. Volume is paltry as it exchanges less than 5,000 shares a day.
The product holds a large basket of 1,420 stocks, which are pretty well spread out across each component like the other earnings counterparts. The top three sectors include information technology, financials and consumer discretionary. While the ETF is spread out across various market caps, it is still focused on large caps as these account for nearly 78% of the total. EXT is up 5.5% in the year-to-date time frame.
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