U.S. Markets close in 1 hr 26 mins

2 ETFs That Surged to Rank #1 Braving All Odds

Sweta Killa

The broad stock market is caught in a nasty web of worries that deepened with the start of 2016. This is especially true given the oil crash to a level not seen in more than 12 years and renewed worries about persistent weakness in the world’s second largest economy – China. The combination is intensifying fears of a global slowdown.


Additionally, weak corporate earnings, slumping commodities, geopolitical tensions, a strong dollar, sluggishness in the other emerging markets like Brazil and Russia, slowing growth in Japan and Europe and the recent spate of weak U.S. economic data added to the financial market instability. Now with the Q4 earnings season underway, investors are wary of the impact of these issues on the earnings picture (read: 3 Sector ETFs & Stocks to Bet on for Q4 Earnings).

 

As per Zacks Earnings Trends, Q4 earnings from all the S&P 500 members are expected to decline 6.8% on an annual basis on 4.5% lower revenues. As per the earnings Factset, the S&P 500 earnings are projected to decline 5.3% in Q4 of 2015. This would mark three consecutive quarters of a year-over-year decline in earnings since Q1 2009 to Q3 2009. Despite weak corporate earnings and huge levels of stock market volatility, many investors still would want to bet on a slowly improving U.S. economy, which is backed by a healing job market and rising consumer confidence.


For these investors, we delved 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 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 sector funds have seen their Rank surging to the top hierarchy from #3 (Hold) and could be great picks this earnings season.

 

PowerShares Dynamic Semiconductors Fund (PSI)


While the weakness in the PC market will continue hurting demand for personal computers and servers due to soft global economic growth, growth in the semiconductor industry is expected from automotive technology and the Internet of Things (IoT). As the world is becoming increasingly digital, demand for novel and advanced technologies are growing by leaps and bounds. As per Gartner, the number of IoT devices will surge 30% year over year to 6.4 billion in 2016 and will reach 20.8 billion by 2020.


While there are few ETFs that surged by two notches, PSI gathered maximum attention as it has the lowest P/E of 15.86 of the four funds in this space. This fund tracks the Dynamic Semiconductor Intellidex Index, holding 29 securities in the basket. It is pretty well spread out across components with none holding more than 6.14% of assets. The ETF is skewed toward small caps at 49% while large caps and mid caps account for 27% and 24%, respectively. The product, with AUM of $50.2 million is often overlooked by investors and hence sees a lower average daily volume of around 27,000 shares. The product charges a little higher fee of 63 bps a year and has lost 10.3% so far this year (read: Intel Tops Q4; Shares Fall: Should You Buy Its ETFs?).

 

PowerShares Dynamic Media Portfolio (PBS)


Though the media industry is currently struggling with changing consumer habits and the new age of entertainment, many firms are joining the web world allured by the growing online customer base and lower advertising prices. This would provide a boost to the industry as the companies are adopting new ways of generating revenues from other sources. Given this, the media ETF looks like an intriguing pick heading into the earnings season. This fund tracks the Dynamic Media Intellidex Index and seeks to offer capital appreciation by investing in companies that are selected on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value (see: all the Consumer Discretionary ETFs here).


The approach results in a small basket of 30 media stocks with none of the firms holding more than 5.71% share. Within the media sector, about one-fourth of the portfolio is allotted to cable & satellite while television & radio, Internet & mobile applications and movies & entertainments round off the next three spots with double-digit exposure each. The product has amassed $98.7 million in its asset base while trades in moderate volume of about 77,000 shares a day. The ETF charges 59 bps in annual fees and has lost nearly 9% so far this year.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
PWRSH-DYN SEMI (PSI): ETF Research Reports
 
PWRSH-DYN MEDIA (PBS): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report