ETFs for Earnings Season
A more than 10% drop in the equity markets since April has presented a gift to investors who want to buy stocks ahead of earnings season. ETFs in the technology and energy sectors look set to perform well.
In my ETF Action Newsletter I have a hefty exposure to technology through the PowerShares QQQ (QQQQ) and First Trust Dow Jones Internet Index(FDN).
QQQQ has about 20% of its portfolio in Apple(AAPL), with big name technology companies rounding out the top ten. Microsoft(MSFT), Google(GOOG) and Qualcomm(QCOM) each have more than 4% of the fund’s assets, but the weightings fall quickly and number 10 holding Gilead Sciences(GILD) has less than 2% of assets.
The huge weight in Apple makes the company the driving force in QQQQ and it’s been a positive one over the past three months. Shares are up more than 16% in this period, compared to a loss of about 6% for the Qs.
Even though Apple has had a good run, the launch of the iPad and the iPhone 4 are likely to power earnings and generate a positive outlook from the company. Analysts did a better job of forecasting Apple’s earnings in the previous quarter, coming in too low by only 36%, much better than the 70%-plus misses in the previous three quarters.
Earnings estimates for this quarter have already climbed more than 6% in the past month and they’re likely to be too low, once again. Therefore, I expect Apple to continue to pull QQQQ higher.
A fund with potentially more upside, however, is FDN. This fund is down about 5%, similar to QQQQ over the past three months, but the performance of the top components was the opposite. Whereas Apple pulled QQQQ higher, Google(GOOG), Amazon(AMZN), eBay(EBAY), Yahoo(YHOO) and Juniper(JNPR) have dragged on FDN’s performance, with losses ranging from about 10% to more than 20%. Estimates for these five firms, which account for about 32% of the ETF, have held steady over the past few weeks.
At nearly 10% of assets, Google may be the most important of the group, and if the buzz over iPhone 4 is helping Apple, Google may be in for its own rally. The Android operating system is gaining wider acceptance from consumers and the newest phones are very competitive in terms of features. Motorola(MOT) is rolling out new Android phones, while Samsung is launching phones for all five major U.S. wireless networks. In August, the next generation of the Android operating system will also be available.
Given that one-third of FDN has been pulling the fund lower and investors haven’t been optimistic, I anticipate that this ETF will be able to outperform QQQQ during earnings season, although I expect both to do well.
As for energy, the global selloff in May hammered oil prices and energy stocks alike, while the BP(BP) disaster has kept a cloud of uncertainty over the industry as regulators consider new rules for drilling.
Oil prices have rebounded into the mid $70s per barrel though, and while there are worries about a weak economic recovery, demand for oil remains robust. Investors have been focused on negative news and a weak stock market, but analyst estimates for oil majors such as Chevron(CVX) and ConocoPhillips(COP) have been climbing.
In terms of ETFs, a solid play on the broad energy sector can be had with the Energy Select Sector SPDR(XLE). The fund owns the oil majors, independent producers and service companies such as Schlumberger (SLB) and Halliburton(HAL). Thanks to the hefty yield on some of the majors, the fund also delivers a solid 2% dividend yield.
For investors interested in a more aggressive energy ETF, the SPDR S&P Oil & Gas Equipment & Services ETF(XES) is the way to go. Although the fund is broadly diversified, with individual holdings ranging from 4.4% to 3.7% of assets, it still has taken a beating over the BP disaster in the Gulf. Shares have underperformed XLE and are down more than 20% since the Deepwater Horizon accident, well ahead of the roughly 15% drop in XLE and the 10% decline in the S&P 500 Index.
Last year, stocks were trading in early July at the same level they were at two months earlier in May. A positive earnings season was kicked off by Goldman Sachs(GS) and the rest of the market’s solid earnings generated a powerful rally. With fear high right now, investors may be pleasantly surprised by better earnings numbers next month, and it’s the energy and technology sectors that may deliver some of the best results.
