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5 Sector ETFs to Bet on Ahead of Q4 Earnings

Although Q4 earnings growth is expected to decelerate significantly from the last two quarters due to rising cost pressures and supply chain disruptions, the earnings picture remains strong.

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This story originally appeared on Zacks

The Q4 earnings season is set to kick off this week with the banking sector slated to report numbers. Although Q4 earnings growth is expected to decelerate significantly from the last two quarters due to rising cost pressures and supply chain disruptions, the earnings picture remains strong.

Total S&P 500 earnings are expected to be up 19.8% from the same period last year on 11.6% higher revenues. This would follow the 41.5% rise in earnings in Q3 and 95.1% growth in Q2 (read: Take a Look at Top-Performing ETF Sectors of 2021).

Of the 16 Zacks sectors, 11 are expected to earn more relative to the year-ago quarter. Energy, transportation & aerospace will likely see huge earnings growth from the year-ago-quarter as aerospace incurred loss while energy and transportation barely reported positive earnings.

The other eight sectors are expected to witness positive year-over-year earnings growth. Basic materials is expected to be the biggest contributor to S&P 500 earnings with 80.3% growth. This is likely to be followed by consumer discretionary (46.5%), construction (22.2%) and medical (16.9%).

Given this, we have highlighted one ETF from the five sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

- Zacks

Aerospace

The aerospace and defense sector is benefiting from the recovering commercial aviation market. Additionally, defense spending is a key part of the country’s budget and is likely to remain unperturbed by the economic situation. As such, iShares U.S. Aerospace & Defense ETF ITA seems a compelling choice.

iShares U.S. Aerospace & Defense ETF provides exposure to U.S. companies that manufacture commercial and military aircraft, and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index.

iShares U.S. Aerospace & Defense ETF holds 34 stocks in its basket with AUM of $2.6 billion and an expense ratio of 0.42%. The product trades in an average daily volume of around 197,000 shares. iShares U.S. Aerospace & Defense ETF has a Zacks ETF Rank #3 with a Medium risk outlook.

Transportation

Travel has rebounded strongly with more Americans getting vaccinated, business and economies being reopened, and consumer confidence growing. The transport sector is expected to post strong results on the back of these positives and iShares U.S. Transportation ETF IYT seems a good pick (read: ETF Set to Gain Post FedEx Solid Q2 Earnings).

iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 50 securities. Within the transportation sector, railroads, and air freight and logistics take the top two spots with 32.1% and 30.2% share, respectively, while trucking (21.8%) and airlines (14.5%) round off the next two.

iShares U.S. Transportation ETF has $1.9 billion in AUM and has a good trading volume of around 161,000 shares a day. It charges 41 bps in fees per year and has a Zacks ETF Rank #2 with a High risk outlook.

Energy

The energy sector has been benefiting from higher oil prices driven by supply disruptions and unprecedent demand. Vanguard Energy ETF VDE offers broad exposure to the energy sector. It tracks the MSCI US Investable Market Energy 25/50 Index, holding 104 stocks in its basket. Integrated Oil & Gas dominates the portfolio with 40% share while oil & gas exploration & production, and oil & gas storage & transportation round off the next two with double-digit exposure each (read: 5 Energy ETFs Making the Most of Oil Price Surge).

Vanguard Energy ETF manages $6.3 billion in its asset base and sees a good volume of about 1.3 million shares. VDE charges 10 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook.

Materials

The materials sector, which tends to be the most sensitive to global economic growth expectations, has been performing well with economic recovery gathering pace. The increase in prices of various types of raw materials added to the strength. Additionally, a tight policy means solid economic growth, which in turn results in higher demand for materials. This has made the materials sector attractive and Materials Select Sector SPDR XLB could be intriguing pick.  

Materials Select Sector SPDR is the most popular material ETF that follows the Materials Select Sector Index. It manages about $8.6 billion in its asset base and trades in volumes as heavy as around 6 million shares. Materials Select Sector SPDR holds about 28 securities in its basket and charges 12 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with 69.2% share, while metals & mining and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #1 with a Medium risk outlook (read: 7 ETF Predictions for 2022).

Consumer Discretionary

The Fed’s tightening prospect and rising consumer confidence have provided a boost to consumer discretionary sector earnings. The tight policy is seemingly the result of a pickup in economic growth supported by solid job growth, wage growth and increased lending activity that result in higher spending power. Vanguard Consumer Discretionary ETF VCR, which has a Zacks ETF Rank #2 with a Medium-risk outlook, can be an exciting pick.

Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 304 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail, automobile manufacturers, and home improvement retail occupy the top spots with double-digit exposure each.

Vanguard Consumer Discretionary ETF is one of the low-cost choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 129,000 shares a day. The fund has managed about $7.6 billion in its asset base so far.



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Materials Select Sector SPDR ETF (XLB): ETF Research Reports

 

iShares U.S. Transportation ETF (IYT): ETF Research Reports

 

Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports

 

iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports

 

Vanguard Energy ETF (VDE): ETF Research Reports

 

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Zacks Investment Research