An Earnings ETF for Earnings Season

Earnings season is here and this week, investors will be treated to an avalanche of reports from the financial services sector, the S&P 500’s second-largest sector weight.

S&P 500 profits forecast to decline for the first time since 2012 but financials are projected to deliver the best earnings growth in the S&P 500 this year and the sector is one of just three forecast to show double-digit profit growth. Investors should also be keeping watchful eyes on companies that have recently delivered big earnings beats.

“According to Jaseem Hasib, Vice President of S&P Capital IQ’s Global Market Intelligence, over the past 10 years, when companies have a big beat in one quarter they come back and beat again in the next quarter an above-average 75% of the time and miss only 19% of the time (in line results occur the remainder of the time). Meanwhile, those with a big miss beat only half the time in the next quarter. S&P 500 companies are well covered by Wall Street analysts, with the median company having 19 estimates, nearly double that of a mid-cap S&P 400 index constituent. Yet, Hasib noted that unexpectedly the beat rate for those S&P 500 companies with major positive surprises was greater than the 71% rate for 400 representatives,” said S&P Capital IQ in a new research note.

The earnings-weighted WisdomTree Earnings 500 Fund (NYSEArca: EPS) is one exchange traded fund investors can use to prepare for possible upside surprises this earnings season. EPS tries to reflect the performance of the WisdomTree Earnings 500 Index, which is a fundamentally weighted index that tracks earnings-generating, large-cap U.S. stocks. [An ETF for Companies With Strong Earnings]

As an earnings-weighted ETF, EPS differs from traditional cap-weighted S&P 500 ETFs at the sector level. For example, financials are the largest sector weight in EPS while technology is the biggest sector allocation in cap-weighted S&P 500 funds. Consumer discretionary is the third-largest sector weight in EPS at 11.5%, but that group is the fourth-largest sector weight in cap-weighted S&P 500 ETFs with an allocation of almost 13%. [Not All S&P 500 ETFs are the Same]