Earnings Season Brings Earnings-Focused ETFs Into The Spotlight

From Zacks: The Q4 earnings season has kicked off on a strong note with both earnings and revenue growth tracking above recent quarters. This is especially true as total earnings for 19.1% of the market cap of the S&P 500 companies are up 4.7% while revenues have increased 2.7%, as per the Earnings Trends.

Notably, earnings growth is on track to reach the highest level in eight quarters.

However, earnings surprise of 66.7% is tracking much below the historical periods at this stage given the beat ratio of 81% in Q3, the four-quarter average of 75%, and the 12-quarter average of 71.3%. Similarly, a revenue surprise of 50.8% is well below the 65.1% beat seen in Q3 but is roughly in line with the four-quarter average and 12-quarter average.

Overall, Q4 earnings seem to reflect improvements from Q3, when growth finally turned positive after five back-to-back quarters of decline. Total earnings for the S&P 500 index is expected to grow 4.8% from the same period last year on 3.7% higher revenues. The earnings strength seems broad based with 11 of the 16 Zacks sectors likely to post an earnings increase (read: 4 Sector ETFs & Stocks to Profit from Q4 Earnings Season).

Given this, many investors want to capitalize on this opportune moment with earnings-focused ETFs.

Why Earnings-Focused ETFs

Earnings have been the most important drivers of stock performance over a longer period. This is because earnings are the lifeblood of any business, determining its ability and soundness along with its growth prospects. Earnings-producing companies generally catch investors’ eye due to their solid financial position and growth potential, thereby leading to higher stock prices.

Thus, earnings-weighted ETFs have the potential to move higher relative to any other product in the earnings growth period. As a result, tilting toward this key metric is a sensible choice at present. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplishes this task (read: 5 Growth ETFs & Stocks Set for Explosive Gains in 2017).

Below we have highlighted the funds that could be great choices for investors seeking to make money focusing on one of the most important aspects of stock investing.

WisdomTree Earnings 500 Fund (EPSFree Report)

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 500 stocks in its basket, the fund is well spread out across each component as each holds less than 5% share. Additionally, the product has diverse exposure to a number of sectors with information technology, financials, consumer discretionary, healthcare and industrials taking double-digit exposure each. The ETF has amassed $119.6 million in its asset base and charges 28 bps in annual fees. Volume is light trading in less than 4,000 shares a day. The fund is up 1% so far this year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (see: all the Large Cap ETFs here).

WisdomTree MidCap Earnings ETF (EZMFree Report)

This ETF tracks the WisdomTree MidCap Earnings Index, providing exposure to the 578 earnings-generating mid-cap companies. The fund is widely spread out across each component as each holds less than 1.2% of assets. From a sector look, financials and consumer discretionary take the top two spots with 20.8% and 19.5% share, respectively, followed by financials (16.5%) and information technology (12.1%). The fund charges 38 bps in fees per year while trades in average daily volume of nearly 21,000 shares. It has accumulated $754.6 million in AUM and has added 0.6% so far in the year. EZM has a Zacks ETF Rank of 2 with a Medium risk outlook.

WisdomTree SmallCap Earnings ETF (EESFree Report)

This fund targets earnings-generating small-cap companies by tracking the WisdomTree SmallCap Earnings Index. Holdings 817 stocks in its basket, the ETF provides a nice balance across various securities as each firm holds less than 1.9% share in the basket. Consumer discretionary and financials are the top two sectors with at least 21% share each. The product has amassed $452.4 million in its asset base and sees light volume of around 13,000 shares per day. It charges 38 bps in annual fees and has lost 1.4% so far this year. The product has a Zacks ETF Rank of 2 with a Medium risk outlook (read: 5 Small Cap ETFs and Stocks to Play January & Trump Effect).

WisdomTree Total Earnings ETF (EXTFree Report)

For a broader exposure to earnings-generating stocks across market cap levels, investors should look at EXT. With AUM of $63.8 million, the fund tracks the WisdomTree Earnings Index and charges 28 bps in fees per year. Volume is paltry as it exchanges less than 3,000 shares a day. The product holds a large basket of 1,172 stocks with none holding more than 4.48% share. The top two sectors include financials and information technology, which account for nearly 20% of the portfolio each. While the ETF is spread out across various market caps, it is still focused on large caps as these make up for nearly 80% of the total. EXT is up 1.1% in the year-to-date timeframe.

The WisdomTree Earnings 500 Fund ETF (NYSE:EPS) was trading at $77.75 per share on Tuesday morning, down $0.14 (-0.18%). Year-to-date, EPS has gained 0.63%, versus a 1.34% rise in the benchmark S&P 500 index during the same period.

EPS currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #42 of 108 ETFs in the Large Cap Blend ETFs category.


This article is brought to you courtesy of Zacks Research.

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