Sector ETFs Ahead of Earnings Season

Fourth-quarter earnings season kicks-off Thursday when former Dow component Alcoa (NYSE: AA) delivers results after the close of U.S. markets.

While the fourth-quarter reports and guidance offered by companies have the potential to be exciting, investors may not want to hold their respective breaths for a lot of good news because of 100 companies that have provided a glimpse into their upcoming reports, 80 have delivered negative news.

“This produces a negative-to-positive ratio of 8.0, higher than the 15-year average, offering an inauspicious glimpse of the earnings reporting period to come. Specifically, the S&P 500 is seen growing EPS by 5.7% in Q4 2013 over Q4 2012, on par with Q3 2013 growth,” said S&P Capital IQ Chief Equity Strategist Sam Stovall in a note.

Of the 10 S&P 500 sectors, only energy and utilities are expected to report year-over-year profit declines while technology, telecom and utilities are expected to report top-line shrinkage, according to Stovall. Stung by rising Treasury yields and investors’ thirst for higher beta fare, utilities exchange traded funds were laggards last year even as investors continued clamoring for dividends. The 13% gain posted by the Utilities Select Sector SPDR (NYSEArca: XLU) last year was not even half what the S&P 500 delivered.  [Low Expectations for Utilities ETFs]

Investors looking for strong seasonal plays as Q4 earnings start rolling in can turn to consumer discretionary ETFs. “We expect relatively healthy earnings growth in a seasonally strong fourth quarter for the Consumer Discretionary sector, coming from sub-industries in media and entertainment, automotive, housing, retail and leisure/gaming. We expect a swath of constituent Discretionary companies to benefit in Q4 from spending associated with the holiday season,” said Stovall.

The media and entertainment sub-industry is coming off a stellar run in 2013, one that was strong enough to make the PowerShares Dynamic Media Portfolio (NYSEArca: PBS) the top-performing discretionary ETF. [Media Fund Leads Discretionary ETFs]