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Top ETF Picks for Q2 Earnings Season

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The second-quarter earnings season has kicked off and investors are duly turning their focus on earnings growth, which is expected to be stronger than the previous quarter. Total Q2 earnings growth is expected to increase four times from the previous quarter’s anemic growth to 3.2%. Revenues will likely grow 1.1% on modestly higher net margins.

However, the current earnings estimate is down from 5.5% projected at the start of the second quarter. This does not seem much of a concern, as a busy job market, gradual economic recovery and a still-accommodative policy built up enough strength to cross several hurdles heading toward this earnings season (read: 3 Promising Sectors ETFs Ahead of Q2 Earnings Season).

Though most of the stocks are expected to post stronger earnings for Q2, some are even likely to ride higher with a double-digit earnings beat. Zeroing in on those ETFs with large allocations to stocks that have a high chance of surprising in their upcoming release would therefore be a good idea.

How to Select ETFs?

Handpicking ETFs with a portfolio of stocks that are most likely to beat on earnings is no mean task. However, our proprietary methodology of finding out the Earnings ESP of stocks by calculating the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate is a solid building block.

Betting on ETFs with the winning combination of stocks that have a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) would lead to profits in investor portfolios. This is especially true as an earnings beat will definitely draw investors’ attention and propel the stock price and related ETFs higher. Let’s see how the ETFs have been selected with this combination of stocks.

First, we ran our Zacks stock screener to find out the stocks with positive Earnings ESP and a favorable Zacks Rank. Then, we narrowed down the list by selecting the group of stocks with higher positive Earnings ESP. Accordingly, we chose two ETFs, which contain a few stocks with higher chances of beating estimates in a particular industry (see: all the ETF Categories here).

Our research shows that for the stocks with this combination, the chance of a positive earnings surprise is as high as 70%. As a result, this group could be excellent for investors seeking likely earnings winners this earnings season.

Global X Silver Miners ETF ((SIL - Free Report) )
This fund provides global exposure to companies that are actively engaged in some aspect of the silver mining industry, such as silver mining, refining, or exploration by tracking the Solactive Global Silver Miners index. The fund has a definite tilt toward small cap companies and Canadian firms dominate the fund’s return at 63%.

Holding 27 securities in its basket, the product is heavily concentrated on the top 10 holdings at 62.6% of total assets. Out of these, three firms, Pan American Silver (PAAS - Free Report) , Fortuna Silver Mines (FSM - Free Report) , and Primero Mining Corp have a strong Earnings ESP of 50%, 40% and 33.33%, respectively. This is higher than the Earnings ESP of other stocks in the mining industry.

Further, the Zacks Rank moved up to #3 for Pan American Silver, #2 for Fortuna Silver Mines and #3 for Primero Mining Corp. This suggests outperformance in the coming weeks. Pan American (scheduled to report earnings on August 21) takes the sixth spot in the basket while Fortuna (earnings on August 11) and Primero (earnings on August 7) occupy the third and fourth positions, respectively. Each make up for at least 5% of SIL (read: Can the Run Continue for Silver Mining ETFs?).

The ETF has amassed $273.4 million in its asset base while charges investors 65 bps in fees a year. Average daily volume is good, exchanging more than 260,000 shares. SIL added 27.3% in the year-to-date time frame.

First Trust ISE-Revere Natural Gas Index Fund ((FCG - Free Report) )

This product offers exposure to the U.S. stocks that derive a substantial portion of their revenues from exploration and production of natural gas. It follows ISE-REVERE Natural Gas Index and holds 29 stocks in its basket that are well spread out, with each component holding less than 4.2% of assets.

Most of the stocks in its total holdings are expected to beat earnings estimates and account for nearly 44% of the total assets. These stocks have Zacks Rank of 2 or 3. Some of the stocks with a higher chance of beating estimates are Swift Energy with 150% Earnings ESP, Sandridge Energy (SD - Free Report) with 66.67% Earnings ESP, QEP resources (QEP - Free Report) with 42.42% Earnings ESP and Cabot Oil & Gas (COG - Free Report) with 12% Earnings ESP. These groups of stocks will propel FCG higher when the companies start unfolding their quarterly details in the coming days, especially if the earnings expectations come true.

Apart from stock holdings, investors should note that the fund has a blended style and is diversified across various market cap levels with 35% in large caps, 37% in small caps and 28% in mid caps. This would also drive the fund higher given the mixed economic fundamentals (read: Rising Energy Prices Could Boost This Overlooked Sector ETF).

Though FCG is not much popular in the energy space having AUM of $567.8 million, it sees solid trading in volumes of 493,000 shares per day on average. The ETF charges 60 bps in annual fees and expenses, and has gained nearly 15% so far this year.

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