The fourth-quarter earnings season has commenced with widespread investor concerns over the impact of the big drop in oil prices on earnings. Oil has lost about 60% of its value since its June 2014 peak. But oil is not the only worry. Political instability in Greece and global growth uncertainty also contribute to a cautious outlook.
As such, Q4 earnings estimates have fallen sharply over the past three months from 9.6% growth projected in early October. According to the Zacks Earnings Trend, Q4 earnings for the S&P 500 companies are expected to be up 1.0%, down substantially from 6.9% reported in Q3. Revenues will likely be down 0.7% on modestly higher net margins. Investors should note that the magnitude of negative revisions for Q4 is the highest in recent quarters with energy being the biggest drag, followed by materials, autos, finance and retail.
On the other side, rising manufacturing and industrial activities, better job markets, renewed confidence in the housing market, and rising consumer confidence have pushed the U.S. economy on a stronger growth path not seen in more than a decade. The country is on track for the strongest annual job growth since late 1999. All these are expected to fuel earnings growth in most sectors (read: Market Beating Sector ETFs of 2014).
With that being said, four sectors, namely Medical/Health Care, Transportation, Utilities and Business Services will likely post double-digit earnings growth in Q4 and could emerge as big winners. However, we pick 3 sector ETFs that investors should definitely tap this earnings season. Not only are these picks far better in today’s investment world but are also likely to outperform the overall market in the coming weeks.
Medical/Health Care
The health care sector would likely be the major contributor to earnings this season. It is expected to report 16.8% earnings growth on 8.9% revenues on year-over-year basis for the fourth quarter. Solid industry fundamentals, the merger & acquisition frenzy, new drug approvals, booming population, ever-increasing health care spending, and growth in emerging markets will continue to drive growth.
Investors could tap this sector with the most popular health care ETF – Health Care Select Sector SPDR Fund (XLV)- ETF report. The fund tracks the S&P Health Care Select Sector Index and holds 57 stocks in its basket. It is moderately concentrated on the top five holdings with more than three-fourths of the portfolio. Pharma accounts for 44.2% share from a sector look while biotech, health care providers and services, and equipment and suppliers each have a double-digit exposure (read:5 Must-Have ETFs for 2015).
This fund manages about $12.4 billion in its asset base and trades in heavy volume of around 8.8 million shares. Expense ratio came in at 0.16% annually. The fund gained about 26% over the past one year period and has a Zacks Rank of 2 or ‘Buy’ rating with a Medium risk outlook.
Transportation
This sector, no doubt, is riding high on U.S. economic recovery and increasing investor sentiment. Solid retail, manufacturing and labor data act as major tailwinds to the broad growth, indicating strong demand for movement of goods across many economic sectors, pushing the transport stocks higher. Further, cheap fuel is a big-time boost to earnings growth (read: 2 Sector ETFs to Benefit from the Crude Oil Slump).
The transportation sector is expected to report 15.6% and 5.4% growth in earnings and revenues, respectively. One way to play this trend is with iShares DJ Transport Average Index (IYT) - ETF report. The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 22 securities. The product puts heavy focus on it's top five firms at roughly 40.5%. Further, from a sector perspective, the fund is tilted toward railroad at 47.9% while the delivery service sector makes up for nearly 28% share.
The fund has accumulated $2.1 billion in AUM while sees a good trading volume of 454,000 share a day on average. It charges 43 bps in fees and expense. IYT delivered a return of over 21% over the past one year and has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a High risk outlook.
Utilities
The sector is benefiting from an ever-increasing population, which is fueling demand for utility supplies like water, gas and electricity. In addition, lower interest rates and anxieties in the equity-investing world are driving investors’ interest to the utilities that pay outsized yields and even act as safe havens in turbulent times. These attributes are expected to lead to growth of 12.8% in earnings and 2.3% in revenues in the fourth quarter.
Investors could tap this solid earnings growth potential in the form of Vanguard Utilities ETF (VPU) - ETF report. This ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 79 securities in its basket. It puts nearly 48% of total assets in the top 10 holdings, suggesting moderate concentration. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (33.8%). Gas, water and other utilities make up for small chunks in the basket (see: all the Utilities ETFs here).
VPU is one of the popular and liquid ETFs with AUM of nearly $2.1 billion and average daily volume of roughly 178,000 shares a day. Expense ratio came in at 0.12%. The product added about 28.6% over the trailing one-year period. It has a decent Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.