Earnings Vs. Revenue Weighted ETFs

The earnings recession in the U.S. corporate world has been prevalent for quite some time now. As per the Earnings Trends report issued on August 24, 2016, we have not seen positive earnings growth for the S&P 500 over the last five quarters and are likely to see a decline in the same in the ongoing third quarter as well. Relatively higher greenback, though the strength has diminished slightly in recent times, global growth concerns and persistent pricing concerns in the oil patch led to such weakness (read more: Earnings Recession Put These ETFs in Focus).

As of now, as much as 96.9% of the S&P 500 companies reported earnings, with 3% dip in year-over-year earnings growth on 0.4% decline in revenues. In fact, investors should note that revenue weakness seen in recent times is not as grave as earnings. In Q1 as well, earnings plunged 6.5% while revenues dipped 1%. For the upcoming Q3 earnings season, earnings are expected to slide 2.8% while revenues are likely to expand 1.5% (read more: Follow Goldman Sachs (NYSE:GS)' Strategy with These ETFs).

This is a fairly good indication because sales are harder to be influenced in an income statement than earnings. A company can come up with decent earnings s by adopting cost-cutting or some other measures which do not speak for the companies’ core strength. However, it is difficult for a company to mold revenue figures.

In such an earnings-revenue backdrop, let’s take a look at which ETFs, earnings-weighted or revenue-weighted grabbed the spotlight in the Q2 earnings season.

Oppenheimer Large Cap Fund (MU:RWL) Versus WisdomTree Earnings 500 Fund (TO:EPS)

RWL: Stocks in the fund is graded on the basis of the top line. The top three holdings of the fund are Wal-Mart (NYSE:WMT) (4.57%), Apple (NASDAQ:AAPL) (2.34%) and Exxon Mobil (NYSE:XOM) (2.01%). Consumer cyclical (22.07%), consumer non-cyclical (21.46%) and financials (12.03%) are three of the leading sectors. The fund charges 49 bps in fees.

EPS: It offers exposure to broad U.S. large cap companies which are profitable. The top three stocks are Apple (5.02%), Berkshire Hathaway (NYSE:BRKa) (2.52%) and JPMorgan Chase (NYSE:JPM) (2.51%). The fund charges 28 bps in fees. Financials (21.76%), IT (20.38%) and Consumer discretionary (11.39%) round out the top three sectors.

OppenheimerMid Cap Fund RWK Versus WisdomTree MidCap Earnings ETF (SNX:EZM)

RWK: The same revenue-weighted objective isapplied here on the mid-cap level. Ingram Micro Inc-Class A (3.19%), World Fuel Services Corp (2.11%) and Avnet Inc. (2.02%) are the top three stocks here. The fund charges 54 bps in fees. Consumer cyclical (24.62%), Industrials (19.5%) and Consumer Non-Cyclical (8.94%) are the top three sectors of the fund.

EZM: In this mid-cap earnings-focused ETF,Antero Resources (1.86%), Navient Corp (0.92%) and Popular Inc (0.89%) hold the top three spots. Financials (23.2%), Industrials (19.92%) and Consumer Discretionary (18.85%) are three of the leading holdings in the fund. The fund charges 38 bps in fees.

Oppenheimer Small Cap Fund RWJ Versus WisdomTree SmallCap Earnings ETF EES

RWJ:This small-cap revenue-weighed fund holds Group 1 Automotive Inc (1.61%), Veritiv Corp (1.59%) and Core-Mark Holding Co Inc (1.43%) as its top three holdings. Consumer cyclical (23.48%), Industrials (20.48%) and Consumer non-cyclical (16.5%) are the leading sectors of the fund. The net expense ratio of the fund 0.54% (read: Play US Recovery with These Small-Cap Blend ETFs).

EES: This earnings-weighted fund’s top three holdings are EP Energy Corp-Cl A (1.78%), Joy Global Inc (NYSE:JOY) (1.41%) and Evolent Health Inc (1.39%). The fund charges 38 bps in fees. Financials (24.78%), Industrials (22.39%) and Consumer Discretionary (16.95%) are the leading sectors of the fund.

Bottom Line

From the chart given above, we can see that the performance of the revenue-weighted ETFs lagged earnings-weighted ETFs. This could be due to the fact that though revenue growth rates of the S&P 500 companies were higher than earnings, the revenue beat ratio lagged the earnings beat ratio.

In Q2, 54% companies were able to beat the top line while 72.3% managed to surpass the bottom-line mark. Plus, those revenue-weighted funds mostly stress on the top revenue generating companies and not on the growth perspective.

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