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Q3 Energy Earnings Likely to Disappoint: ETFs to Avoid

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The energy sector has shown huge volatility over the past three months. Though tight supply conditions provided some support to oil price, trade disputes and recession fears took a toll on the demand for oil, pushing prices lower. Additionally, rising U.S. shale output and increased production from many producers weighed on the sector (read: Energy ETFs Are Scary Enough to Dump Ahead of Halloween).

The ultra-popular ETFs Energy Select Sector SPDR (XLE - Free Report) , Vanguard Energy ETF (VDE - Free Report) , iShares U.S. Energy ETF (IYE - Free Report) and Fidelity MSCI Energy Index ETF (FENY - Free Report) declined 3.6%, 4.4%, 3.9% and 4.3%, respectively over the past three months. The downside can be attributed to weak Q3 earnings expectations. This is especially true as total earnings for the sector are expected to be down 34% from the same period last year. Revenues are also expected to decline 4.2%.

Let’s delve into the earnings picture of two oil biggies, Exxon Mobil (XOM - Free Report) and Chevron (CVX - Free Report) , which dominate the abovementioned funds’ portfolio and have the power to move the funds up or down in the coming days. Both firms are slated to release their earnings before the market opens on Nov 1, and collectively make up for 43.1% of XLE, 43.1% of IYE, 41.2% of FENY and 40.4% of VDE (see: all the Energy ETFs here).

According to our methodology, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

What’s in the Cards?

Exxon Mobil has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of -0.47%. The company witnessed negative earnings estimate revision of 6 cents over the past seven days for the to-be-reported quarter. The Zacks Consensus Estimate for the company’s earnings indicates a decline of 56.2% from the year-ago quarter reported figure. However, it delivered positive earnings surprise of 11.05% on average over the last four quarters. The stock has a VGM Score of D.

Chevron has a Zacks Rank #3 and an Earnings ESP of 0.00%. It has witnessed downward earnings estimate revision of 31 cents over the past 30 days. The Zacks Consensus Estimate for the company’s earnings indicates a decline of 30.3% from the year-ago quarter reported figure. However, the company delivered average positive earnings surprise of 13.34% in the last four quarters. The stock has a VGM Score of B (read: 4 Sector ETFs & Stocks to Bet on Ahead of Q3 Earnings).

Conclusion

The duo saw negative earnings estimate revisions before the earnings. Analysts declining estimates right before earnings — with the most up-to-date information possible — is not a good indicator for the stock. Additionally, all the four ETFs have a Zacks ETF Rank #5, suggesting some pain for the ETF in the coming weeks. However, these funds have the ability to withstand the shocks from any of the major components in their holdings.

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