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4 Sector ETFs Jump to Top Ranks as Q1 Earnings Hit

Zacks Equity Research

By now, we are all aware of the fact that the Q1 earnings season, which has just taken off, is going to be a soft one. Earnings of the S&P 500 index are likely to decline 10.3% in the first quarter while revenues are expected to fall 0.6% as per Zacks Earnings Trends issued on April 14, 2016 (read: Earnings Recession Put These ETFs in Focus).

The key drag was the energy sector as evident from the 5.2% expected Q1 earnings decline from the ex-oil S&P 500 index, Revenues enter the growth territory (up 2.4%) if we rule out the energy sector weakness from the S&P 500. Notably, the energy sector is expected to report a 105.8% decline in earnings for Q1 on 29.8% lower revenues.

But then, the other 15 sectors constituting the S&P 500 index (as per Zacks methodology) are not sturdy enough.  Only six sectors will likely post mild-to-positive earnings growth this season with acute recessionary impact expected in basic materials (down 23.8%), industrial products (down 25.7%) and conglomerates (down 23.7%).

Needless to say, stocks and the related ETFs will come under pressure post earnings releases of such sectors. Investors might be at a loss as to where to bet their money to reap the return of a bull market, without being perturbed by earnings weakness.

For them, below are four sector ETFs that have soared to the top Zacks Ranks (#1 or #2) at the threshold of the earnings season (read: Winning ETF Strategies for Q2).

Guggenheim S&P 500 Equal Weight Technology ETF (RYT) – #2 (Buy) to #1 (Strong Buy)

Technology ETFs were badly hit in the first quarter of 2016, having returned minutely or posting massive losses as risk-off sentiments loomed large. However, things took a turn for the better lately as a flurry of upbeat U.S. economic data and a dovish Fed whet investors’ risk appetite.

The sector is expected to post 6.7% decline in earnings on 2.6% revenue growth. So, investors intending a momentum play in the tech space can bet on RYT which is an equal-weighted version of the S&P 500 Information Technology Index and gives exposure to a broader technology sector. RYT has a Medium risk outlook.

Guggenheim S&P 500 Equal Weight HealthCare ETF (RYH) – #3 (Hold) to #1

The scenario was almost the same for the broader healthcare sector which returned to health recently. A biotech rebound, compelling valuation, increasing merger and acquisition activities and several important product approvals act as tailwinds to the sector.

The broader medical sector is projected to post 0.9% growth in earnings in Q1 on bumper 9.1% higher revenues. No points for guessing why investors should target this space right now. An intriguing bet on this sector is RYH which is an unmanaged equal-weighted version of the S&P 500 Health Care Index. RYH has a Medium risk outlook.

Market Vectors Gaming ETF (BJK) – #3 to #1

This gaming sector falls into the consumer discretionary category, which should be on a smooth road ahead on compelling valuation, expectations of a longer low-rate environment due to a dovish Fed and a softer dollar driving earnings of companies with considerable exposure in foreign lands.

The consumer discretionary space looks better placed than many other sectors for the first-quarter earnings season. The sector is likely to record 1.8% earnings growth on 5.8% growth in revenues (read: 3 Consumer Discretionary ETFs Upgraded to Strong Buy).

The fund, BJK, gives investors exposure to the overall performance of the largest and most liquid companies in the global gaming industry. From a country look, U.S. takes the top spot at 34.0% while Australia and China round off the top three with a double-digit exposure each.

IQ US Real Estate Small Cap ETF (ROOF) – #3 to #2

As the U.S. Treasury bond yields are hovering at lower levels despite a slowly improving economy, the outlook for real estate is looking up. The sector performs well in a low-yield environment while a growing economy ensures demand for real estates.

Investors can bet on this trend via ROOF which is made up of small-cap stocks – the best capitalization to play the recovering domestic economy. Plus, ROOF yields about 5.80% annually (as of April 14, 2016) and can act as a decent income destination for investors.

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GUGG-SP5 EW TEC (RYT): ETF Research Reports
GUGG-SP5 EW HEA (RYH): ETF Research Reports
MKT VEC-GAMING (BJK): ETF Research Reports
IQ-US RE SC (ROOF): ETF Research Reports
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Zacks Investment Research
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