Earnings Recession Put These ETFs In Focus

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Includes: EES, EPS, EZM
by: Zacks Funds

The word 'recession' has lately been uttered quite frequently. Sometimes it is used in the perspective of the overall economy and at other times it is associated with corporate earnings. While the fear of former seems exaggerated - especially for the U.S. economy - it actually holds true for the latter.

The fourth-quarter results from 62% of the S&P 500 components that are out, give cues of weakness on all sides. The growth picture has been utterly sluggish reflecting prolonged global growth worries, a stronger greenback and a persistent decline in oil prices. As of now, the corporate projections and macroeconomic instability suggest that the earnings weakness is here to stay.

The earnings of the S&P 500 index is likely to decline 4.6% in the first quarter of 2016 while revenues are expected to fall 1.7% as per the Zacks Earnings Trends issued on February 3, 2016. The earnings and revenue expectations are projected to fall 1.9% and 2.1% respectively in the second quarter of 2016. However, things will enter in the positive territory from the third quarter.

Coming to small-cap earnings, 25.5% of the Russell 2000 index components have come up with their quarterly results. Total earnings for these companies are up 0.2% on 2.1% higher revenues, with 43.7% beating EPS estimates and 34.2% surpassing revenue expectations.

While the smaller part of the capitalization was able to post earnings and revenue growth unlike their larger cousins (as small cap companies are less exposed to foreign lands and thus less hurt by the dollar strength), the figures were not outright bullish. Plus, the major chunk of the segment is yet to report.

In such an offhand earnings scenario, investors would like to bet on stocks and ETFs that have relatively a higher power of generating earnings. To do so, investors can definitely take a look at the below-mentioned WishdomTree earnings ETFs across capitalization that provide exposure to companies with positive cumulative earnings over their most recent four fiscal quarters.

WisdomTree Earnings 500 ETF (NYSEARCA:EPS)

This fund provides exposure to earnings-generating companies within the large-cap segment of the broad U.S. stock market by tracking the WisdomTree Earnings 500 Index. The $119.6-million ETF invests in about 495 securities. While Financials takes the top spot with about 21.5% weight, IT (19%), consumer discretionary (11.9%), health care (11.0%), industrials (10.9%) and consumer staples (10.8%) also take double-digit exposure. EPS is off 8.6% so far this year, but has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 6 Incredible ETFs & Stocks on Sale).

WisdomTree MidCap Earnings ETF (NYSEARCA:EZM)

This fund targets the earnings-generating mid cap companies by tracking the WisdomTree MidCap Earnings Index. This $607.8-million fund is also heavy on the financial sector (22.8%), while consumer discretionary (19.1%), industrial (18.9%) and IT (12.1%) round out the top four positions. The fund charges 38 bps in fees. Holding 600 stocks in its portfolio, the fund does not put more than 2.2% in any security. EZM is off 8.1% so far this year (as of February 5, 2016). The fund has a Zacks ETF Rank #3 with a Medium risk outlook.

WisdomTree SmallCap Earnings ETF (NYSEARCA:EES)

This is for the earnings-generating small-cap companies. Holdings 891 stocks in its basket, the ETF provides a nice balance across various securities as each firm holds less than 1.75% share in the basket. However, the fund is tilted toward the financial sector with one-fourth portfolio, followed by industrials (21.07 %), consumer discretionary (17.4%) and information technology (10.9%).

The product has amassed $323.2 million in its asset base. It charges 38 bps in annual fees. EES has lost 11.5% since the start of the year (as of February 5, 2016). It has a Zacks ETF Rank of 3 with a Medium risk outlook.

Bottom Line

As one can see from the performance trend, the afore-mentioned ETFs failed to live up to their unique investment objective in recent trading due to the broader market sell-off. However, investors may consider these funds once the stormy market clams down.

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