The Q3 earnings season has just kicked in and investors are worried about the impact that the China-led global growth concerns will have on the earnings picture. Adding to the woes were some Q2 issues like sluggishness in other developed and developing economies, lower oil prices, a strong dollar, uncertain timing of the rates hike, and a slump in commodities that spilled over into Q3.
All these factors would continue to heighten the financial market instability and could dampen earnings growth. This is especially true as Q3 earnings estimates have fallen substantially over the past three months from a decline of 2.7% to decline of 5.6% as per the Zacks Earnings Trend. This is worse than earnings decline of 2.2% reported in Q2. Revenues are also expected to decline by 5.5% versus the 6.5% decline in Q1.
While the earnings weakness seems broad based with energy being the biggest drag, autos and transportation are the only sectors with double-digit growth. Further, the earnings growth rates for medical, construction and financial sectors are strong (read: 2 ETFs Rising to Rank #1 This Earnings Season).
Given this, we have highlighted five ETFs – each from these expected winning sectors – that investors should definitely tap this earnings season. Not only are these picks far better in today's investment world, they are also likely to outperform the overall market in the coming weeks.
Automotive
The U.S. automotive sector has been riding high with the overall industry on track to record its best year of sales since 2000. Increased consumer spending, lower gasoline prices, rising income, high demand for light trucks, a plethora of new models, need to replace aging vehicles and the easy availability of credit at lower interest rates are adding adequate fuel to the industry. These attributes will lead to a strong auto earnings growth of 21.2%, making it the best sector of the third quarter despite the big Volkswagen scandal.
Investors could ride the earnings growth potential with a pure play – First Trust NASDAQ Global Auto ETF ((CARZ – ETF report)) – that provides global exposure to the 37 auto stocks by tracking the NASDAQ OMX Global Auto Index. Japanese firms dominate the fund's portfolio with more than one-third share and the top five holdings account for at least 8% share each. CARZ is under appreciated as indicated by its AUM of only $32.5 million and average daily trading volume of under 8,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 2 or ‘Buy' rating with a High risk outlook (read: ETF & Stocks Riding on Auto Sector Boom).
Transportation
The transport sector is expected to report earnings growth of 17.0% year over year for the third quarter. While a strong dollar is eating away the profits of big transporters, the sector remains the biggest beneficiary of cheaper oil prices, and increasing consumer confidence and spending. Further, higher demand for the movement of goods across many economic sectors acts as a major catalyst for earnings growth. One way to play this trend is with iShares Dow Jones Transportation Average Fund ((IYT – ETF report)), which tracks the Dow Jones Transportation Average Index and holds 20 stocks in its basket.
The fund is highly concentrated on the top firm – FedEx (FDX) – at 11.8% while other firms hold less than 8.1% of assets. Air freight & logistics takes the top spot at 29% while railroad, trucking and airlines round off to the next three spots with double-digit allocation each. The product has accumulated nearly $846.7 million in AUM while sees a good trading volume of more than 418,000 shares a day on average. It charges 43 bps in fees and expenses and has a Zacks ETF Rank of 3 or ‘Hold' rating with a High risk outlook (read: 4 Sector ETFs for Q4).
