Where Q1 Earnings Growth Was and Wasn’t Among Sector ETFs

ETF Trends

With first-quarter earnings season all but complete, it is accurate to say some sectors and the corresponding exchange traded funds saw far better earnings growth than others. That is to say, overall first-quarter earnings growth was tepid.

“Despite a 4.6 percentage point improvement in growth from the trough of -1.2% seen on April 10, first-quarter 2014 still marks the weakest quarter for profit growth since the third quarter of 2012 (2.4%). EPS also remain suppressed at $27.59, missing last quarter’s all-time record by $0.88,” said S&P Capital IQ in a new research note.

S&P Capital notes the stodgy, often slow-moving telecom and utilities sectors were the primary drivers of first-quarter EPS growth for the S&P 500 with growth rates of 42.6% and 24%, respectively.

Year-to-date, the Utilities Select Sector SPDR (XLU) is the top performer among the nine sector SDPR ETFs. XLU entered Wednesday with a 2014 gain of 14.7%, as utilities have benefited from slumping Treasury yields.

Investors have poured $683.5 million into XLU this year, an indication of the shift away from momentum sectors to more docile, income-generating fare. XLU, which has a dividend yield of 3.43%, is historically the best of the nine SPDRs during the month of June. S&P Capital IQ rates the ETF overweight. [Best Sector ETFs for June]

Weak links in terms of first-quarter earnings growth included the financial services and materials sectors.

“It should be no surprise at this point that financial companies were the biggest laggards during the quarter. Indeed, the ex-financials growth rate for the S&P 500 is much improved at 6.2%, showing how heavily the sector weighed on the overall index. Big misses from JPMorgan Chase (JPM) and Bank of America (BAC) drove the sector further into the red, with Bank of America expecting losses toextend into the second quarter,” said S&P Capital IQ.

The Financial Select Sector SPDR (XLF) , the largest U.S. sector ETF, is up 3% year-to-date and currently trades within spitting distance of its 52-week. Those are arguably impressive feats when considering XLF and rival financial services ETFs have had to deal with the Federal Reserve rejecting Citigroup’s (NYSE: C) plans to return capital to shareholders and Bank of America rescinding its dividend increase. [Bank ETFs Deal With BofA Dividend News]

Those stocks combine for 11% of XLF. Diversified financial services were also hit by EPS declines.

“The diversified financials services industry had earnings declines of 43% relative to the prior year. This industry weakness also masked the 20% and 19%, growth for the Real Estate Investment Trusts (REITs)and insurance industries.,” said S&P Capital IQ.

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