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3 Top Ranked Sector ETFs for Earnings Season

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The stronger-than-expected jobs report on Friday brought the ‘tapering’ talk back in focus. Many economists now believe that the Fed may start scaling back its easing program as early as in September this year. As a result, the 10 year benchmark yield soared to 2.73% last week--its highest level since August 2011.

As the market prepares for the post-QE world, companies’ fundamentals--earnings in particular--will return to the forefront. The second quarter earnings season has now kicked-in, with Alcoa reporting yesterday. Overall, this earnings season is expected to be rather lackluster. Per Zacks Research Director Sheraz Mian, earnings for S&P 500 companies are expected to increase only 0.4% from the same period last year.

At the same time, some sectors are expected to report better earnings than others. (Read Zacks Earnings Trends: Will Earnings Growth Bottom in Q2) Now may be a great time to consider investing in some of the sectors that are expected to report positive earnings growth in the coming days. Below we have analyzed three Zacks top ranked ETFs to play these sectors.

Finance—Excellent Earnings Growth with an Improved Outlook

Per Zacks estimates, Finance will reassume its dominant earnings position in the index which was taken over by the Tech sector after the 2008 crash. Total earnings for finance sector are expected to be up +18.6% and estimates for the group continue to rise. . (Read: Buy these ETFs for improved insurance sector outlook)

Finance sector (banks and insurers in particular) is expected to be one of the biggest beneficiaries of a steepening yield curve. Another reason to be bullish on the financial sector is its potential for increasing dividends and buybacks. Financials have accounted for the largest increase in dividends in the last three years. This year so far has already been excellent in terms of dividends/buybacks increases by finance companies as many of them got Fed approval after passing stress tests.   

S&P Financial Select Sector SPDR Fund (XLF - Free Report)

The largest and the cheapest fund within the financials space--XLF tracks S&P Financial Select Sector Index. Launched in December 1998, this fund has attracted more than $14.9 billion in assets. (Read: 3 All American ETFs to buy now)

The product holds 82 securities in its basket, with top allocations to Berkshire Hathaway, JP Morgan and Wells Fargo. It charges an expense ratio of just 18 basis points and has a dividend yield of 1.56% currently.

XLF is currently a Zacks Rank #2 (Buy) ETF.

Consumer Discretionary and Retail Maintain Positive Earnings Growth

Consumer cyclical sectors are among a few others sectors that are expected to maintain a positive growth during the second quarter.  And this comes as no surprise as consumer confidence remains near multi-year high and consumer spending has remained resilient despite sluggish economic growth.

Consumer Discretionary sector is expected to report 8.9% earnings growth and Retail is expected to report 5.9% earnings growth for the second quarter. (Read: Winning Strategies for the second half)

Consumer discretionary and retail stocks have been doing pretty well in recent months as the labor market showed clear signs of healing. Further, rising housing market and surging stock market added to the “wealth effect”, resulted in rising consumer confidence. Lower gasoline prices during the past few months have also been helping consumers.

Improvement in the economic outlook and low inflation will continue to benefit retail and consumer discretionary stocks. Research also shows that these cyclical or economically sensitive sectors have benefitted in the rising rate scenario.

SPDR S&P Retail ETF (XRT - Free Report)

XRT was launched in June 2006 and has amassed more than $1.2 billion in assets so far. The fund holds 97 companies in its basket and comes with a low cost of 35 basis points a year.

Its equal weight focus also ensures that the risk is pretty spread out. Apparel Retail (29%), Specialty Stores (15%) and Automotive Retail are the top three sectors that the fund is invested in.

XRT is currently a Zacks Rank #1 (Strong Buy) ETF.

Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)

Launched in December 1998, XLY has amassed $ 6.2 billion is assets so far, which are currently invested in 85 securities. In terms of sectors, Media (30%), Specialty Retail (19%) and Hotels Restaurants & Leisure (15%) occupy the top three spots.

With an expense ratio of just 18 basis points, this is one of the low-cost choices in the space.

XLY is currently a Zacks Rank #1 (Strong Buy) ETF.

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