The ETFs For Sectors With Growing Earnings

The energy sector is the seventh-largest sector weight in the S&P 500 at just under 7 percent. Despite that relatively diminutive status within the benchmark U.S. equity index, energy continues to be a drag on S&P 500 earnings.

With second-quarter earnings season winding down, some analysts are forecasting that the quarter will be the fifth consecutive of year-over-year earnings declines for the S&P 500, with energy being a big reason why. Strip out energy for the second quarter and S&P 500 earnings were probably flat.

Still, the Energy Select Sector SPDR (ETF) XLE is up 13.5 percent this year, good for the second-best performance among the sector SPDR exchange traded funds. XLE, the largest energy ETF, trails only the Utilities SPDR (ETF)XLU, which is higher by 19.1 percent year-to-date.

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Energy sector earnings are down nearly 79 percent year-over-year, according to AltaVista Research. The utilities sector, the third-smallest sector weight in the S&P 500 at just 3.4 percent, has seen its earnings rise, but just to the tune of 2 percent.

“With about 85 percent of S&P 500 firms having reported Q2 results, it looks as if overall index earnings likely fell by about $8.6 billion, or 3.3 percent (Figure 1). This is the fifth consecutive quarter of year-on-year declines in earnings. Given current consensus estimates for Q3, it is likely that this earnings recession will grind on for one more quarter, before ending with a positive showing in Q4,” said AltaVista in a recent note.

Investors looking for ETFs tracking sector with solid earnings can turn to the Consumer Discretionary SPDR (ETF)XLY, but there is some caution necessary here. The consumer discretionary sector posted year-over-year earnings growth of more than 11 percent, but much of that growth is attributable to Amazon.com, Inc. AMZN, XLY's largest holding.

AltaVista rates XLY underweight due in part to recently slack earnings contributions from the likes of Nike Inc NKE and Walt Disney CoDIS.

The healthcare sector has seen year-on-year earnings growth of 5.4 percent, according to AltaVista, though the Health Care SPDR (ETF) XLV has been hampered this by election year rhetoric weighing on biotechnology and pharmaceuticals stocks.

As has been the case for the entire downturn so far, Energy (XLE) was the primary culprit. In Q2, its 79 percent decline in profits was enough to drag the entire S&P into negative territory. Excluding Energy, the index would likely have posted a small gain of 0.4 percent. Consumer Discretionary (XLY) was the biggest contributor to profit growth, followed closely by Health Care (XLV), but they were offset by weaker results from Financials (XLF) and Consumer Staples (XLP),” added AltaVista.

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