On the corporate earnings front, U.S. companies have had a relatively solid earnings season to open up the year. Financials have once again been leading the way, but guidance has been decent all around, especially with many forecasting a decent recovery this year.
Still, some investors are starting to worry about brewing troubles in Europe and concerns that are building over the government sequester. This issue could through the market back into the doldrums, especially if growth levels slide as a result of this reduced spending level (also see Defensive Sector ETFs for the Fiscal Cliff).
This type of environment suggests that earnings will be a big focus of the market, and that strong earning companies will be the main driver of return going forward. This suggests that those who miss earnings will be greatly punished, leaving investors to zero in on stocks with rosier outlooks for big gains after this recent market surge.
Against this backdrop, a focus on earnings could be ideal, and can easily be done by looking at the Zacks ETF Rank.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, region, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio, we have taken a closer look at the top ranked EPS below:
WisdomTree Earnings 500 ETF (EPS)
Launched in February of 2007, the WisdomTree Earnings 500 ETF (EPS) tracks the WisdomTree Earnings 500 Index. The index measures the performance of 500 large cap companies which have shown positive earnings growth over the past four fiscal years. The index is a subset of the WisdomTree Earnings Index.
The ETF has been able to amass an asset base of just $over $50 million, something that has kept volumes level low. The fund does pay out a yield of 2% and charges investors an expense ratio of 28 basis points (read Play Four Megatrends with These ETFs).
The ETF allocated maximum across sectors such as Information Technology (21.16%), Financials (16.37%), Energy (13%), Consumer Discretionary (11.18%) and Healthcare (10.74%). From an individual holdings perspective, the ETF currently holds 494 securities in its portfolio with top allocations going to firms like AAPL, XOM, and CVX (read Top Ranked Biotech ETF: FBT).
The ETF has returned 11 for the trailing one year period. From a risk perspective, the ETF has shown relatively low variability in its prices as indicated by an annualized standard deviation of 16.75%. For the same time period the benchmark S&P 500 has had an annualized standard deviation of 18.71%, although it has outperformed EPS by a bit in the time frame.
Given that the performance has been pretty close with lower volatility, we give the fund a low risk outlook and a Zacks ETF Rank of 1 or ‘Strong Buy’. This means that we expect this product to outperform ones in a similar style box over the course of the next year, making it a great choice for those seeking a low volatility play in this environment.
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