ETFs for Earnings Growth

March 14th at 8:15am by Todd Shriber

Fourth-quarter earnings season is essentially in the books and the results, though mixed from sector to sector, were solid overall. Expectations are in place for solid, but weaker profit reports for the first quarter, meaning now is a good time to evaluate exchange traded funds tracking sectors that could deliver attractive bottom-line increases.

“With just a few companies set to report fourth-quarter 2013 earnings, the S&P Capital IQ consensus forecast is $28.45, with strong 8% growth,” said the research firm. “As of March 11, 495 companies reported earnings results for the fourth quarter. Of those, 317 beat analysts’ estimates, 123 missed, and 55 met. This 64% beat ratio compares favorably to the 62% average.”

Financial services and materials were two of the main drivers of S&P 500 earnings growth in the fourth quarter. The Materials Select Sector SPDR (NYSEArca: XLB), which S&P Capital IQ rates overweight, surged 9.5% in February, making it the best performer among the nine sector SPDR ETFs. Chemicals makers continue to benefit XLB as Dow Chemical (NYSE: DOW) and DuPont (NYSE: DD) are up an average of 8% this year. DuPont and Dow are XLB’s two largest holdings, combining for 20.6% of the fund’s weight. [The Prudent Approach to Materials ETFs]

Although capital markets firms were fourth-quarter earnings laggards, the broader financial services sector posted earnings growth of 17.2%, according to S&P Capital IQ. The Financial Select Sector SPDR (NYSArca: XLF), rated overweight by S&P Capital IQ, is up only modestly this year, but the ETF has jumped 7% since the start of February.

For 2014, financial services, the second-largest sector weight in the S&P 500, is again expected to be one of the largest contributors to the index’s expected earnings growth 7.8%. If all goes well, financials will also be one of the largest drivers of S&P 500 dividend growth. The Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR) program is underway and the results should be made public soon, potentially providing  a boost to XLF and the SPDR S&P Insurance ETF (NYSEArca: KIE), among other ETFs. KIE is also rated overweight by S&P Capital IQ.

Looking toward  first-quarter earnings, in addition to telecom, S&P Capital IQ sees strong EPS growth out of the consumer discretionary sector.

“Despite bad weather during the holiday shopping season, the sector is expected to show 8.9% growth in the first quarter on the heels of a 7.4% gain in the fourth quarter. From an industry perspective, Internet and Catalog Retail (22%), Multiline Retail (14%), Media (14%) and Specialty Retail (10%) should be some of the better areas,” said S&P Capital IQ.

The overweight-rated Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) allocates 12.1% of its weight to Intenet and catalog retailers and nearly 30% of its weight to media names, including Dow component Walt Disney (NYSE: DIS) and cable giant Comcast (NasdaqGS: CMCSA).

Materials Select Sector SPDR