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Top Ranked ETF for Earnings Season

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With another important earnings season just around the corner, profit reports once again look to come into focus for the market. This could be especially important this quarter as the economy has seen decent—but not amazing—data in a number of key market segments.

Furthermore, the panic over the Fed’s new plans for QE tapering appears to be over, allowing investor to once again focus on profits and earnings outlooks to move stocks. Yet while some investors are likely pleased that the Fed will not be much of a factor over the next few weeks, it is worth pointing out that this earnings season might be sluggish.

Expectations for earnings growth have now fallen into negative territory, a far cry from the 3.9% growth that was predicted for Q2 earnings at the start of April. In this type of sluggish environment, and given the broad Fed concerns hanging over stocks, it may be best to focus on profitable companies and tilt more assets towards these strong-earning firms.

One way to do this is by looking at top ranked ETFs which have a focus on profitable companies with strong earnings. A new system to rank ETFs in these types of categories is the Zacks ETF Rank which we have briefly highlighted below (see all the Top Ranked ETFs).

About the Zacks ETF Rank

This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, a Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk (see Zacks ETF Rank Guide).

Using this strategy, we have found an ETF which is Ranked 1 or ‘Strong Buy’ with this model which we have discussed in greater detail below. This fund tilts towards companies with large amounts of earnings, and so could be a safer—but still very broad—play on the U.S. markets during this uncertain time:

The WisdomTree Earnings 500 ETF (EPS) tracks the WisdomTree Earnings 500 Index which comprises predominantly of large cap stocks having positive earnings in the preceding four quarters. The ETF offers a core fundamental play on the large cap space as it is weighted on the basis of earnings.

The ETF was launched in 2007 and since then has been able to amass an asset base of $73 million. This can be considered quite unpopular especially when compared to other ETFs from the large cap space. One of the major reasons for its lack of popularity is its comparatively high expense ratio of 28 basis points. This is much more than what most large cap ETFs charge, with several charging less than 10 basis points a year.

Still, the ETF has managed to earn its keep and outperform broader markets over the past two years. In this time frame, the fund has added 22.4%, compared to a a return of 20.9% for the SPDR S&P 500 ETF (SPY).

The ETF is a low risk product as it exhibits a lower realized volatility than other large cap ETFs. It has an annualized standard deviation of 16.58%. For the same time frame the S&P 500 Index has an annualized standard deviation of 18.52% (see Is This a Better Large Cap ETF?).

The ETF has spread out exposure across all sectors with maximum allocation to Information Technology (19.17%), Financials (16.71%), Energy (12.58%), Consumer Discretionary (12.10%) and Healthcare (11.16%).

As far as individual holdings are concerned, the ETF spreads its assets across 500 stocks with 23.87% of its total assets invested in the top 10 holdings. EPS has a Zacks ETF Rank of 1 or Strong Buy with a ‘Low’ risk outlook, suggesting it could be a solid choice for this earnings season and beyond.

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