Exchange traded funds allow investors to gain diversified exposure to broad market segments, but this does not mean that ETFs are entirely immune to effects of single stock earnings results.
“Earnings season is particularly important for investors in industry- or sector-focused ETFs,” Todd Rosenbluth, director of ETF research for S&P Capital IQ, told Investor’s Business Daily. “Those products tend to be more concentrated at the stock level and are definitely more concentrated at the industry level.”
One company’s quarterly earnings and revenue growth could be mirrored multiple times across the same industry. If a whole industry does well and a early earnings announcement reflects the strength, many other firms in the same sector may report similarly favorable results, or vice versa.
For instance, Illumina (NasdaqGS: ILMN) revealed a sales miss and an earnings beat on Wednesday. Given its weak results, investors of the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), which includes ILMN among its top ten positions, should watch for any spillover effect on other companies in the industry.
With broader stock ETFs, like those that track the S&P 500 index, Rosenbluth suggests that investors take a broader view or see if most companies are expected to beat estimates.