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Earnings-Weighted ETFs to Tap 7-Year Growth

Sweta Killa

Q1 earnings are likely to be the strongest in many years thanks to tax cuts, rise in oil prices and higher yields, which have driven banks’ profitability. Earnings for the S&P 500 index are expected to grow 16% from the same period last year on 7.4% higher revenues. Earnings growth is much higher than Q4 growth of 13.5% and represents the highest quarterly earnings growth in seven years.

Per Factset, earnings are estimated to grow 17.1% for Q1, marking the best improvement since Q1 2011 and an increase from 11% growth at the start of the quarter.

The earnings strength seems broad based with 14 of the 16 Zacks sectors likely to post an earnings increase, except autos and conglomerates. Double-digit earnings growth is expected from 11 sectors, with energy leading the way. Like the last three reporting cycles, energy remained at the top spot and has the strongest growth projection of 60.2% for Q1. Additionally, the revision trend has been impressive with earnings estimates moving up from 10.9% growth at the start of the period (read: Bet on These Sector ETFs & Stocks for Q1 Earnings).

For the S&P 600 index, total Q1 earnings are expected to be up 14.1% from the same period last year on 10% higher revenues. This would follow 14.8% earnings growth on 7.7% revenue growth in Q4.

Given the strong earnings momentum, many investors want to capitalize on this opportune moment with earnings-focused ETFs.

Why Earnings-Focused ETFs?

Earnings have been the most important drivers of stock performance over a longer period. This is because earnings are the lifeblood of any business, determining its ability and soundness along with its growth prospects. Earnings-producing companies generally catch investors’ eye due to their solid financial position and growth potential, thereby leading to higher stock prices.

Thus, earnings-weighted ETFs have the potential to move higher relative to any other product in the earnings growth period. As a result, tilting toward this key metric is a sensible choice at present. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplishes this task.

Below we have highlighted the funds that could be great choices for investors seeking to make money focusing on one of the most important aspects of stock investing.

WisdomTree Earnings 500 Fund 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. Holding 497 stocks in its basket, the fund is well spread out across each component as each holds less than 5% share. Additionally, the product has diverse exposure to a number of sectors with information technology, financials, healthcare and consumer discretionary taking double-digit exposure each. The ETF has amassed $183.1 million in its asset base and charges 28 bps in annual fees. Volume is light trading around 29,000 shares a day. The fund is down 1.4% so far this year and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Top ETF Stories of January).

WisdomTree MidCap Earnings ETF EZM

This ETF tracks the WisdomTree MidCap Earnings Index, providing exposure to the 571 earnings-generating mid-cap companies. The fund is widely spread out across each component as each holds less than 2% of assets. From a sector look, consumer discretionary takes the top spot with 22.7% share followed by industrials (18.7%), financials (16.2%) and information technology (12.9%). The fund charges 38 bps in fees per year while trades in average daily volume of nearly 85,000 shares. It has accumulated $1 billion in AUM and has lost 2.2% so far in the year. EZM has a Zacks ETF Rank #3 with a Medium risk outlook.

WisdomTree SmallCap Earnings ETF EES

This fund targets earnings-generating small-cap companies by tracking the WisdomTree SmallCap Earnings Index. Holdings 837 stocks in its basket, the ETF provides a nice balance across various securities as each firm holds less than 1.95% share in the basket. Financials, consumer discretionary, industrials, and information technology are the top sectors with double-digit exposure each. The product has amassed $587.1 million in its asset base and sees moderate volume of around 53,000 shares per day. It charges 38 bps in annual fees and has lost 0.2% so far this year. The product has a Zacks ETF Rank #3 with a Medium risk outlook (read: Focus on Small-Cap ETFs Amid Trade War Fears).

WisdomTree Total Earnings ETF EXT

For a broader exposure to earnings-generating stocks across market cap levels, investors should look at EXT. With AUM of $69.3 million, the fund tracks the WisdomTree Earnings Index and charges 28 bps in fees per year. Volume is paltry as it exchanges less than 10,000 shares a day. The product holds a large basket of 1,227 stocks with none holding more than 4.3% share. The top two sectors include information technology and financials, which account for more than 20% of the portfolio each. While the ETF is spread out across various market caps, it is still focused on large caps as these make up for nearly 87% of the total. EXT is down 1.6% in the year-to-date time frame.

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