The Best ETFs To Buy For A Strong Earnings Season (ITB)
Tom Reese
Updated
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From Zacks: The fourth-quarter earnings season is expected to be strong, with earnings growth likely to pick up and continue accelerating after dipping in the preceding quarter.
The S&P 500 index is anticipated to see earnings growth of 9.2% and revenue growth of 7%. The market is also at record levels, scaling series of highs at the start of the year.
The forecast compares favorably with Q3 earnings growth of 6.7% on 5.9% revenue growth. The revision trend has been favorable with earnings estimates holding up better relative to other comparable periods. The earnings estimates for Q4 have moved up 2 percentage points from 8.6% at the start of the quarter. Additionally, 13 of the 16 Zacks sectors are likely to be contributors to earnings growth, suggesting potential upside in many corners of the market (read: 4 ETFs & Stocks from Favorite Sectors for Q4 Earnings).
Given the strong sentiments, investors should focus on ETFs with large allocations to stocks that have a high chance of surprising in their upcoming release. This could result in a winning bet this earnings season.
How to Find the Right ETFs?
Handpicking ETFs with a portfolio of stocks that are most likely to beat on earnings is no mean feat. However, our proprietary methodology of finding the Earnings ESP of stocks by calculating the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate is a solid building block.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Betting on ETFs with the winning combination of stocks that have a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) would lead to profits for investors. This is especially true as an earnings beat will definitely draw investors’ attention and propel the stock price and related ETFs.
First, we ran our Zacks stock screener to find stocks with a positive Earnings ESP and a favorable Zacks Rank. Then, we narrowed down the list by selecting the group of stocks with higher positive Earnings ESP. Accordingly, we chose three ETFs, which comprise few stocks with higher chances of beating estimates in a particular industry (see: all the ETF Categories here).
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. As a result, these funds could be excellent for investors seeking guaranteed profits this earnings season.
This fund offers exposure to 26 large biotechnology corporations by tracking the MVIS US Listed Biotech 25 Index. About 34% of the stocks in the portfolio are expected to beat earnings this quarter. Amgen (AMGN – Free Report) , Celgene (CELG– Free Report) , Illumina (ILMN – Free Report) and Incyte INCY are among the top 10 holdings, having an Earnings ESP of +1.45%, +1.46%, +1.96% and +53.15%, respectively. These firms have a Zacks Rank #3 and collectively account for 30.1% of assets. Biomarin Pharmaceutical (BMRN – Free Report) , which accounts for a 4.10% share in the basket, also has a Zacks Rank #3 and an Earnings ESP of +49.43%.
BBH has amassed $629.3 million in its asset base and charges 35 bps in fees per year. Volume is moderate as it exchanges 33,000 shares daily on average. It has a Zacks ETF Rank #3 with a High risk outlook (read: Value Biotech ETFs to Buy Now).
This fund follows the Dynamic Retail Intellidex Index, which measures the performance of companies engaged in operating general merchandise stores such as department stores, discount stores, warehouse clubs and superstores; specialty stores, including apparel, electronics, accessories and footwear stores; and home improvement and home furnishings stores. In total, the product holds 30 securities with about 40% of the stocks in the portfolio expected to come up with an earnings beat, suggesting solid upside for the ETF. In particular, Best Buy BBY, Dollar Tree DLTR, Home Depot (HD – Free Report) and Walgreens Boots Alliance WBA, which are among the top 10 holdings and account for 5% share each, have an Earnings ESP of +5.29%, +10.29%, +9.02%, and +1.39%, respectively.
The fund has accumulated just $13.6 million in its asset base and charges 63 bps in fees per year. Average daily volume is paltry at 2,000 shares. The ETF carries a Zacks ETF Rank #2 with a Medium risk outlook (read: Holiday Sales At 6-Year High: Best Consumer ETFs & Stocks).
PowerShares Dynamic Energy Exploration & Production Portfolio (PXE – Free Report)
This product follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. It holds 30 stocks in its basket, 40% of which have higher chances of beating estimates this quarter. The four firms — Continental Resources CLR, ConocoPhillips COP, EOG Resources EOG and Occidental Petroleum Corp OXY — have an Earnings ESP of +17%, +3.17%, +16.88% and +18.77%, respectively. EOG has a Zacks Rank #2, while the rest have a Zacks Rank #1.
PXE is an expensive choice in the energy space, with 0.64% in expense ratio. The fund has AUM of $57.4 million and trades in a volume of 11,000 shares a day on average. It has a Zacks ETF Rank #3 with a High risk outlook (read: Energy ETFs & Stocks Soaring to Start 2018).
This fund provides a pure play to 48 home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. About 38% of the assets in the basket are expected to surprise this quarter with top firm — DR Horton (DHI – Free Report) — having a Zacks Rank #1 and an ESP of +5.90%. DHI accounts for nearly 13% share in the basket. Other firms like Toll Brothers (TOL – Free Report) , Home Depot (HD – Free Report) and Lowes Companies (LOW – Free Report) have an Earnings ESP of +1.35%, +9.02% and +5.16%, respectively, and have a Zacks Rank #3.
The product has amassed $2.7 billion in its asset base and trades in robust volume of more than 2.3 million shares a day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook (read: Top-Ranked ETFs & Stocks That Crushed the Market in 2017).
The iShares Dow Jones US Home Const. ETF (ITB) was unchanged in premarket trading Tuesday. Year-to-date, ITB has gained 4.55%, versus a 4.14% rise in the benchmark S&P 500 index during the same period.
