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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 Index ETF (NASDAQ: CARZ ) – 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. 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 the iShares Transportation Average ETF (NYSEARCA: IYT ) , 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 (NYSE: 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. Medical/Health Care Though the twin attacks of the recent global market rout and Hillary Clinton’s tweet might dampen the bottom lines of the health care companies, the sector is still expected to report solid earnings growth of 8%. This is primarily thanks to solid industry fundamentals, including rising mergers & acquisitions, emerging market expansion, positive demographic trends and innovation of new products. Investors could find the largest and ultra-popular Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) an exciting pick to benefit from the current trends. The fund follows the S&P Health Care Select Sector Index, holding 57 stocks in its basket. It is largely concentrated on the top two firms – Johnson & Johnson (NYSE: JNJ ) and Pfizer (NYSE: PFE ) – at 10.3% and 8%, respectively. Other firms hold less than 5.7% of assets. Pharma accounts for 38.8% share from a sector look, followed by biotech (24.3%), health care providers and services (19.4%), and equipment and supplies (13.7%). The fund manages about $13.5 billion in its asset base and trades in heavy volume of more than 11.3 million shares. Expense ratio came in at 0.15% annually. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a Medium risk outlook. Construction The housing sector emerged relatively unscathed by the recent global market turmoil, which has hit almost every corner of the investing world. The major strength came from the industry-specific fundamentals such as growing demand for homes and affordable mortgage rates. The sector is expected to post 7.5% earnings growth for Q3. Investors seeking to ride this growth could consider the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) . This fund provides a pure play to the home construction sector by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 41 stocks with double-digit allocation going to D.R. Horton (NYSE: DHI ) and Lennar (NYSE: LEN ). Homebuilding takes the top spot at 64.6%, followed by 14.9% in building products and 9% in home improvement retail. The product has amassed $2.1 billion in its asset base and trades in heavy volume of around 3.7 million shares a day on average. The ETF charges 43 bps in annual fees and has a Zacks ETF Rank of 2 with a High risk outlook. Financials This sector also offers opportunities of healthy returns to investors this earnings season with an expected earnings growth rate of 7.5%. Better expense management, rising fees from surging M&A activity, lower litigation charges, solid loan growth, steadily improving credit quality, growing trading businesses and improving balance sheets are fueling optimism in the broad sector. A broad way to play this trend is with Financial Select Sector SPDR ETF (NYSEARCA: XLF ) , having AUM of $17.1 billion and average daily volume of around 35 million shares. The ETF tracks the S&P Financial Select Sector Index, holding 90 stocks in its basket. The top three firms – Berkshire Hathaway (NYSE: BRK.B ), Wells Fargo (NYSE: WFC ), and JPMorgan Chase (NYSE: JPM ) – account for over 8% share each while other firms hold less than 5.8% of assets. In terms of industrial exposure, banks take the top spot at 36.3% while insurance, REITs, capital markets and diversified financial services make up for double-digit exposure each. The fund charges 15 bps in annual fees and has a Zacks ETF Rank of 2 with a Medium risk outlook. Link to the original post on Zacks.com Scalper1 News
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