The overall Q3 earnings picture for the S&P 500 looks weak with projected earnings growth of 2.3% after double-digit growth in each of the first two quarters of the year. Additionally, earnings growth in the last quarter of the year is expected to be in high single digits. Expected Q3 revenue growth of 5% is also lower than growth of 5.5% in Q2 and 7.6% in Q1 as well as 6.2% projected growth for Q4. This indicates Q3 growth on track to be the lowest of this year.
While only half of the sectors are expected to post positive earnings growth this season, revenue growth are widespread with just auto sector set to post revenue decline. Against this backdrop, revenue-weighted ETFs will likely take lead over earnings-weighted strategies and could be the potential outperformer this earnings season.
Why Revenue-Weighted ETFs?
First, while a series of headwinds might weigh on the profitability of companies, the decline in dollar could offer some relief to the top line. As such, many companies could come up with unexpected growth in revenues in their quarterly reports, giving a boost to revenue-weighted ETFs. Though the ICE U.S. Dollar index, a measure of the dollar’s strength against a basket of currencies, showed immense strength in September, it is down nearly 2.4% in the last three months (read: 4 ETF Ways to Profit from a Rise in Dollar).
Second, revenue-weighted funds have outperformed the earnings counterparts from both the short and long-term periods, proving the credibility of the superior-weighting methodology. This is because revenues are a better indicator of a company’s financial health. The top line is harder to manipulate or alter on a quarter-by-quarter basis as opposed to earnings that can easily be fattened using accounting tricks thereby leading to inaccuracy.
As a result, tilting toward the revenue metric is a more sensible choice. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplish this task. Below, we have highlighted the funds that could be great choices for investors seeking to make money from the weak earnings of this year while at the same time focus on one of the most important aspects of stock investing.
Oppenheimer Large Cap Fund (RWL - Free Report)
This fund provides exposure to the top revenue-generating companies within the large-cap segment of the broad U.S. stock market. It consists of the same securities as of the S&P 500 Index. Holding 507 stocks in its basket, the fund is slightly concentrated on the top firm Wal-Mart (WMT - Free Report) at 4.3% of total assets while other firms hold no more than 2.2% share. Consumer discretionary, healthcare, financials, consumer staples, industrials and information technology are the top six sectors making up for a double-digit exposure each. The ETF has amassed $770.5 million in its asset base and charges 39 bps in annual fees. Volume is moderate trading in about 60,000 shares a day. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Large Cap ETFs here).
Oppenheimer ESG Revenue ETF
This fund provides access to the top 50% of securities in the S&P 500 Index by ESG score, excluding those with a detrimental score for controversies, and is weighted by revenue instead of market capitalization. It is home to 232 stocks with each holding no more than 3.7% share. From a sector look, consumer discretionary, industrials, information technology, consumer staples and healthcare receives double-digit exposure each. The ETF has been able to manage $23.6 million in AUM since inception on Oct 28 while trades in meager volume of around 500 shares, suggesting wide bid/ask spread beyond the expense ratio of 0.40%.
iShares Russell 1000 Pure U.S. Revenue ETF (AMCA - Free Report)
This is the newest ETF having amassed $2.6 million since its debut in early August. It offers exposure to American companies that generate 85% or more of their sales from the United States by tracking the Russell 1000 Pure Domestic Exposure Index. It holds a well-diversified basket of 422 stocks as none accounts for more than 3.6% share. However, one-fourth of the portfolio is tilted toward financials while consumer discretionary, utilities and healthcare round off the next spots with double-digit exposure each. The product charges 15 bps in annual fees and trades in paltry volume of 2,000 shares a day on average (read: Play US and Revenues with iShares' New Large-Cap ETF).
Oppenheimer Financials Sector Revenue ETF
This ETF offers investors targeted access to the same stocks as the S&P 500 Financials Index but weighed each security by revenue instead of market capitalization. It holds 69 stocks in its basket with a large exposure to Berkshire Hathaway at 15.7% while other firms hold no more than 7.3% of assets. The product failed to garner investors’ attention as depicted by its AUM of $35.8 million and average daily volume of 2,000 shares. It charges 0.45% in expense ratio and has a Zacks ETF Rank #3 (read: Top-Ranked ETFs That Crushed S&P 500 in the Bull Market).
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