Earnings Pleasantries With These ETFs

There are still plenty of marquee reports to be delivered, but with the fourth-quarter earnings season progressing, some trends are becoming clear. Investors can use sector exchange-traded funds to play those trends.

XLF In Focus

For example, the Financial Select Sector SPDR Fund XLF, the largest financial services ETF and an ETF that has spent ample time in the spotlight over the past two years, is one fund investors can use to gain access to a sector that is posting rising earnings.

“It’s still early in reporting season, but early results indicate that Financials were likely the largest single contributor to S&P 500 earnings growth during the fourth quarter of 2016,” said AltaVista Research in a recent note. “With only about 10 percent of S&P 500 firms having reports results — and using consensus expectations for the remaining 90 percent — we calculate that overall index earnings likely grew by about $19 billion, or 7.6 percent year-on-year, driven by a nearly 18 percent improvement in results for firms in XLF.” 

XLF has traded slightly lower to start 2017, but the benchmark financial services ETF is up more than 39 percent over the past year. Notably, the energy sector, the seventh-largest sector weight in the S&P 500, is no longer a drag on S&P 500 earnings, according to AltaVista data. The Energy Select Sector SPDR (ETF) XLE is up 43.1 percent over the past 12 months.

A Look At XLE

XLE constituents posted revenue growth, on average, of 4.5 percent during the final quarter of 2016. All sectors notched revenue increases with the aggregate number for the S&P 500 checking in at 5.2 percent revenue growth, according to AltaVista data.

“Sales growth also appears to be picking up. Revenue probably grew about 5.2 percent year-on-year in Q4 (5.3 percent excluding the impact of Energy), which is an improvement on growth figures in recent quarters in the three percent range. The biggest contributor to overall index revenue growth came from the Consumer Discretionary sector (XLY), which saw a healthy 7.6 percent gain year-on-year, worth $33 billion,” said the research firm.

Expanding To XLY

Amazon.com, Inc. AMZN, by far the largest holding in the Consumer Discretionary SPDR (ETF) XLY, reports earnings after the close of U.S. markets on February 2.

To this point, “surprises in the Consumer Discretionary sector have been more widespread, and overall amount to a 7.1 percent 'beat' of consensus forecasts,” noted AltaVista.

Disclosure: Todd Shriber owns shares of XLF.