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5 Excellent ETF Plays as Q2 Earnings Cycle Begins

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The second-quarter reporting cycle is underway with a few major banks set to report this week. Earnings for the S&P 500 index are expected to grow 19.1% from the same period last year on 8.2% higher revenues. This would represent the third consecutive quarter of double-digit earnings growth, a trend that is currently expected to continue in the second half of the year. A strong economy and historic tax cuts will continue to drive earnings higher.

This optimism of double-digit growth has shifted investors’ attention back to equities, dissipating fears of a global trade war. Second-quarter estimates moved up modestly since the quarter began with energy, construction, basic materials and tech leading the way. However, consumer discretionary, consumer staples, autos, finance, and conglomerate sectors saw their earnings estimates trending down.

Of the 16 Zacks sectors, 11 are expected to post double-digit earnings growth. Like the last three reporting cycles, energy remained at the top spot and has the strongest growth projection of 139.7% for Q2. This is followed by projected earnings growth of 53.6% for basic materials, 45% for construction, and 24.5% for industrial products. However, sectors like autos and conglomerates are expected to have lower Q2 earnings than the year-ago level (read: Winning & Losing Sector ETFs From June Jobs Data).

Earnings for the small cap S&P 600 index are projected to outperform once again in Q2. Total earnings are expected to be up 27% on 8.2% higher revenues, following 24.4% earnings growth on 8.6% revenue growth recorded in Q1. While energy sector has been the biggest laggard with projected earnings decline of 536.5%, financial, construction, basic materials and industrial products are expected to record earnings growth of 32.5%, 30.4%, 27.3% and 23.4%, respectively.

Given the overall earnings picture, we have highlighted a few ETFs that could make great plays as the Q2 earnings season unfolds. Each of these ETFs have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Invesco Dynamic Building & Construction ETF (PKB - Free Report)

This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It is moderately concentrated across components, with each holding no more than 5.2% of the assets. In terms of industrial exposure, homebuilders and building materials account for nearly half of the portfolio while construction materials, engineering and construction, and specialty retail round off the top five with double-digit allocation each. The fund has amassed assets worth $237.5 million while seeing moderate volume of around 65,000 shares per day on average. Expense ratio comes in at 0.63%. PKB has a Zacks Rank #3 with a High risk outlook (read: U.S. Manufacturing in the Pink: How Long Will ETFs Gain?).

First Trust Materials AlphaDEX Fund (FXZ - Free Report)

This product follows the StrataQuant Materials Index, holding 49 stocks in its basket. None of the securities holds more than 3.81% share. Chemicals dominates the portfolio with 38.4% of assets while metals & mining, and containers & packaging round off the next two spots with a double-digit allocation each. The fund has accumulated $311.9 million in its asset base and charges 65 bps in annual fees. It trades in good average daily volume of less than a million shares and has a Zacks ETF Rank #2 with a Medium risk outlook.

Invesco DWA Industrials Momentum ETF (PRN - Free Report)

This fund provides exposure to 40 companies by tracking the Dorsey Wright Industrials Technical Leaders Index. It is well balanced across each security with none accounting for more than 4.7% share in the basket. In terms of industrial exposure, aerospace and defense, road & rail, and building products make up the top three. The fund has amassed $113.1 million in its asset base and charges 60 bps in annual fees. It has a Zacks ETF Rank #2 with a Medium risk outlook (read: Trump Renews Global Trade War Fears: ETF Winners & Losers).

Invesco S&P SmallCap Financials ETF (PSCF - Free Report)

This ETF offers exposure to the small cap corner of the broad financial segment by tracking the S&P SmallCap 600 Capped Financials & Real Estate Index. It holds 131 securities in its basket with none accounting for more than 2.22% of assets. Banks take the largest share at 37.3% followed by REITs (24.3%) and insurance (14%). The product has accumulated $251.8 million in its asset base while trading in small volume of 13,000 shares a day on average. It charges 29 bps in annual fees and has a Zacks Rank #3 with a Medium risk outlook.

WisdomTree SmallCap Earnings ETF (EES - Free Report)

This fund targets earnings-generating small-cap companies by tracking the WisdomTree SmallCap Earnings Index. Holdings 832 stocks in its basket, the ETF provides a nice balance across various securities as each firm holds less than 1.6% share in the basket. Financials, consumer discretionary, industrials, and information technology are the top sectors with double-digit exposure each. The product has amassed $732.1 million in its asset base and sees moderate volume of around 63,000 shares per day. It charges 38 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read:Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).

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