Exchange-traded funds that invest in sector-specific portfolios of equities may present significant advantages to investors who are looking for an efficient means to place tactical bets during earnings season. Earnings season is the period of time during which a large number of publicly traded companies release their quarterly earnings reports. In general, each earnings season begins one or two weeks after the last month of each quarter (December, March, June and September). It is common to see heightened trading activity in equity markets during this time as traders attempt to capitalise on the large influx of new information to the market.

Chris Beauchamp, Senior Market Analyst, IG Group.

The release of earnings by Alcoa, a major aluminium producer and Dow Jones Industrial Average component, marks the unofficial start of earnings season. The firm’s report, which was most recently released on Monday 11 April, is one of the first major companies’ earnings to be made available after the end of each quarter and coincides with an increasing number of earnings reports being released.

Chris Beauchamp, Senior Market Analyst at IG Group, commented on the benefits of utilising sector ETFs at this time compared to other vehicles of investment: “Using these ETFs to play earnings season takes advantage of the key features of ETFs, namely their low costs. It would save investors the need to research individual companies to attempt to identify out-performers, and while overall returns may not be as high as individual names, it will also help to reduce losses from investing in the underachievers of this earnings season.”

While it is usually the difference between reported results and analysts’ consensus that has the most impact in moving markets, Beauchamp notes that the negative sentiment surrounding energy stocks makes these sector ETFs a risky investment: “FactSet expects profits at S&P 500 companies to have fallen by 8.5% from the previous quarter, a remarkable drop from the 0.8% growth in earnings that had been forecast at the start of the year. Of course, much of this is down to energy. If energy is taken out then the forecast is still for a drop of 1.8%. This comes after a remarkable rally in equity prices that has many wondering whether the range bound nature of markets from mid-2015 to February 2016 is finally at an end, or whether the start of a new big correction is upon us.”

Commenting on which sectors he believes may outperform during earnings season, Beauchamp said: “Some sectors are expected to see earnings growth however, and these include Consumer Discretionary, Health Care and Telecoms. As a result these sectors may outperform others where earnings are expected to decline.”

Investors looking to follow Beauchamp’s suggestions may wish to consider the following ETFs:
iShares S&P 500 Consumer Discretionary Sector UCITS ETF (IUCD) – 0.15% TER
iShares S&P 500 Health Care Sector UCITS ETF (IUHC) – 0.15% TER
iShares S&P 500 Information Technology Sector UCITS ETF (IUIT) – 0.15% TER
SPDR S&P US Consumer Discretionary Select Sector UCITS ETF (SXLY) – 0.15% TER
SPDR S&P US Health Care Select Sector UCITS ETF (SXLV) – 0.15% TER
SPDR S&P US Technology Select Sector UCITS ETF (SXLK) – 0.15% TER