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ETF Winners from Q3 Earnings Season

Sweta Killa

The Q3 2014 earnings season appears to be a decent one, with no big surprises or huge disappointments. This is especially true as total earnings for the S&P 500 companies that have reported so far are up 6.7% on an annual basis with a beat ratio of 71.6% while revenues have increased 4% with a beat ratio of 57.9%.

While the earnings growth rate is lower than Q2 and almost in line with the recent quarterly averages, the revenue growth is trending better. With respect to surprises, earnings and revenue beat ratios are following divergent paths, with earnings surprises notably more widespread and revenues on the weak side.

From a sector perspective, auto is the star performer with an earnings beat ratio of 90% that propelled stocks in this industry higher by an average of 2.9% (average price difference between a day before and after the earnings announcement of a stock), as per the Zacks Earnings Trends. The aerospace and defense sector follows closely with an earnings beat ratio of 88.9%. The stocks in this space gained an average of 2.69% buoyed by earnings (read: Strong Aerospace and Defense Stock Earnings Put These ETFs in Focus).

Though both sectors are leading the way on earnings surprises, auto is the only sector that has shown earnings decline of 21.6%. When it comes to stronger earnings growth rates, construction and basic materials are the largest contributors with 17.9% and 17.6%, respectively. Other five sectors – medical, business services, industrial products, basic materials, consumer discretionary and transportation – also recorded double-digit earnings growth in Q3.

Considering all the key metrics, several equity ETFs have impressed with their performances and have generated double-digit returns over the trailing one month. While there are winners in many corners of the space, below we highlight the top three ETFs that buoyed up on robust S&P 500 earnings and have easily led the broad market fund (SPY) in the same period:

iShares Dow Jones Transportation Average Fund (IYT)

This fund targets the transportation corner of the broad U.S. equity market by tracking the Dow Jones Transportation Average Index. In total, the product holds 21 securities with the largest allocation going to FedEx (FDX) at 11.4%. Other firms hold less than 8% share. The ETF has a certain tilt toward large cap stocks at 47% while mid and small caps account for 42% and 11% share, respectively, in the basket (read: ETFs and Stocks to Buy in November for Sweet Returns).

From a sector perspective, railroad takes the top spot with about one-fourth share, while delivery service (22.7%) and trucking (18.1%) round off to the top three. The fund has accumulated $1.8 billion in AUM while sees good trading volume of more than 388,000 shares a day. It charges 43 bps in annual fees and has gained about 15.3% over the trailing one-month period. The fund has a Zacks Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

Market Vectors Biotech ETF (BBH)

This fund offers exposure to the biotech corner of the broad healthcare space and tracks the Market Vectors US Listed Biotech 25 Index. The fund has amassed $656.2 million in its asset base while sees moderate trading volume of nearly 90,000 shares a day. It charges a reasonable 35 bps fees per year.

Holding 26 securities in the basket, the product is largely concentrated on the top three firms – Gilead Sciences (GILD), Amgen (AMGN) and Celgene (CELG). These three firms combine to make up for 37.2% of assets. Large caps account for 64% share while mid caps take the remainder with just 6% going to small caps. The ETF added 14.5% over the past month and has a Zacks Rank of 1 with a Medium risk outlook (read: Buy These Top Ranked ETFs on Solid Biotech Stock Earnings).

Industrial Select Sector SPDR (XLI)

This is by far the most popular industrial ETF in the space with more than $9.4 billion in AUM and an average daily volume of nearly 10.3 million shares. The fund follows the S&P Industrial Select Sector Index, holding roughly 64 stocks in its basket. The ETF has a heavy skew toward large cap securities at 84%, though it has a pretty even distribution in terms of industries (read: Strong Industrial Stock Earnings Put These ETFs in Focus).

The product allocates about one-fourth of the assets to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit allocation. In terms of holdings, General Electric (GE) takes the top spot at 9.9% while no other firms account for more than 5.85% of XLI. This ETF is up about 12.1% over the past month and has a Zacks ETF Rank of 3 or ‘Hold’ rating with Medium risk outlook.









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