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How to Capitalize Q2 Earnings Optimism With ETFs

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Earnings have rebounded not only from the pandemic-hit 2021 but also from the from the pre-COVID Q2 of 2019. This is especially true as S&P 500 earnings are expected to be up 62.2% from the same period last year on 18.2% higher revenues and 9.6% from Q2 of 2019.

The earnings projection reflects an improvement from 50.6% growth expected at the start of Q2 and follows 49.3% earnings growth in Q1. Most of the strength is due to easy comparisons to last year’s pandemic-hit period. Notably, last year’s June quarter represented the peak of the pandemic’s earnings impact when S&P 500 earnings dropped 32.2% from the year-earlier period. Four of the 16 Zacks sectors — consumer discretionary, autos, energy & transportation — actually lost money in Q2 of 2020. The Zacks consumer discretionary sector lost $251 million in Q2 2020, while the auto, energy and transportation sectors lost $1.2 billion, $9.6 billion and $5.3 billion, respectively (read: Sector ETFs, Stocks to Bet on Q2 Solid Earnings Expectation).

These sectors are now projected to report positive earnings. The other 12 sectors are also expected to witness positive year-over-year earnings growth. Basic material is expected to be the biggest contributor to S&P 500 earnings with 246% growth. This was followed by aerospace (160.3% earnings growth), finance (92.8%), and industrial products (63.6%). In fact, 9 of the 16 Zacks sectors are expected to earn more than they did in second-quarter 2019, including technology (up 31.8%), basic materials (77.4%), medical (20.3%), retail (25.6%) and construction (58.9%).

Per CNBC, the second-quarter earnings season looks like the mother of all earnings reports, with estimates having risen steadily over the past six months, from 45% growth in January to 65% growth today compared with the same period last year. It marks the strongest rate of growth since 2009, when earnings were just starting to recover from the disaster of the Great Recession. According to Factset, Q2 earnings are estimated to grow 64%, which would represent the highest year-over-year growth since Q4 of 2009.

Earnings strength is broad-based with small caps projected to report much better. For the small-cap S&P 600 Index, total earnings are expected to soar 185.1% from the same period last year on 21.9% higher revenues. This would follow 374.3% earnings growth on 10.1% revenue growth in Q1.

Given the strong earnings momentum, many investors want to capitalize on this opportune moment with earnings-focused ETFs.

Why Earnings-Focused ETFs?

Earnings have been the most important drivers of stock performance over a longer period. This is because earnings are the lifeblood of any business, determining its ability and soundness along with its growth prospects. Earnings-producing companies generally catch investors’ eye due to their solid financial position and growth potential, thereby leading to higher stock prices (read: Dow ETF Set to Rise Further as Q2 Earnings Kick Off).

Thus, earnings-weighted ETFs have the potential to move higher relative to any other product in the earnings growth period. As a result, tilting toward this key metric is a sensible choice at present. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplishes this task.

Below we have highlighted the funds that could be great choices for investors seeking to make money focusing on one of the most important aspects of stock investing.

WisdomTree Earnings 500 Fund (EPS - Free Report)

This fund provides exposure to earnings-generating companies within the large-cap segment of the broad U.S. stock market by tracking the WisdomTree U.S. LargeCap Index. Holding 502 stocks in its basket, the fund is well spread out across each component as each accounts for less than 5% share. Additionally, the product has diverse exposure to a number of sectors with information technology, financials, healthcare and consumer services taking a double-digit exposure each. The ETF has amassed $587.9 million in its asset base and charges 8 bps in annual fees. Volume is light, trading around 30,000 shares a day. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree MidCap Earnings ETF (EZM - Free Report)

This ETF tracks the WisdomTree U.S. MidCap Index, providing exposure to the 462 earnings-generating mid-cap companies. The fund is widely spread out across components as each make up for less than 1% of assets. From a sector look, financials takes the top spot with 22.8% share followed by industrials (19.7%), consumer discretionary (15%) and information technology (10%). The fund charges 38 bps in fees per year while trades in an average daily volume of nearly 46,000 shares. It has accumulated $727.3 million in AUM and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

WisdomTree SmallCap Earnings ETF (EES - Free Report)

This fund targets earnings-generating small-cap companies by tracking the WisdomTree U.S. SmallCap Index. Holdings 693 stocks in its basket, the ETF provides a nice balance across various securities as each firm holds less than 1.4% share in the basket. Financials, industrials, and consumer discretionary are the top sectors with double-digit exposure each. The product has amassed $611.7 million in its asset base and sees moderate volume of around 39,000 shares per day. It charges 38 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Small-Cap ETFs That More Than Doubled in a Year).

In-Depth Zacks Research for the Tickers Above

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WisdomTree U.S. SmallCap ETF (EES) - free report >>

WisdomTree U.S. LargeCap ETF (EPS) - free report >>

WisdomTree U.S. MidCap ETF (EZM) - free report >>