Politicians in Washington finally managed to arrive at a
last-minute deal to avoid the disaster, even though the solution
is only a temporary one. The stock market rejoiced the deal, more
so because the fiscal uncertainty will most likely prevent the
Fed from scaling back the monetary stimulus anytime soon.
Leaving the budget battles and debt-ceiling debate behind, the
market is now focused on earnings. Third quarter earnings have
been a mixed bag so far, but at the same time, investors are
clearly rewarding stocks and sectors that have been beating or
are expected to beat earnings estimates. One easy way to identify
sectors with improving earnings prospects is to look at Zacks
Industry ranks, which are based on earnings estimate revisions.
And a good way to achieve exposure to those sectors is to invest
in ETFs that have earned top Zacks ranks, based on their
potential to outperform their peers. (Read:
High-Quality ETFs for Long-Term Performance
SPDR KBW Regional Banking ETF (
Finance has been the earnings growth leader this year and the
sector has not disappointed so far in the third quarter. Per
Zacks Earnings Trends
, Finance sector earnings for the 60.1% of the sector's total
market capitalization that have reported already, are up +13.0%.
And, while the growth momentum is slowing, they are
expected to deliver a double-digit earnings growth in the fourth
quarter as well. Finance is currently #9 (out of 62) on the Zacks
M (medium level) industry list.
With the broader financial sector, I prefer regional banks. Most
of the larger banks are hit by stringent regulatory requirements,
falling trading revenues and costly settlements. Regional
banks have been leading the sector most of this year as they were
the main beneficiaries of steepening yield curve and rising
rates. Then, they were big sufferers of the no-taper
But interest rates are expected to rise from the current levels
when the taper-talk returns, benefiting regional banks.
Further, many of the regional banks are seeing a pick-up in
commercial lending, which will partly offset the effect of
decline in mortgage business. (Read:
3 Excellent ETFs for Growing Dividends
KRE is the most popular regional banking ETF, with more than $2.3
billion in assets under management. The ETF holds 81 stocks in
its portfolio, mostly small and mid caps. The fund uses an equal
weight methodology, so company-specific risk is largely
eliminated as no single company makes up more than 1.7% of the
KRE is a Zacks rank #1 (Strong Buy) ETF. (see
the Top Ranked ETFs here
PowerShares Dynamic Leisure & Entertainment ETF (
, Consumer Discretionary sector has the highest earnings growth
rate of all ten S&P sectors at 6.6% for the third quarter.
Further it is one of the few sectors that are expected to see a
double digit earnings growth in the fourth quarter as well.
Safe ETFs to buy in the next shutdown
Consumer discretionary and retail stocks have been doing pretty
well this year as the labor market showed clear signs of healing.
Further, rising housing market and surging stock market added to
the "wealth effect", resulting in rising consumer
While the consumer confidence had slipped recently thanks to
uncertainty created by the drama in Washington, the resolution
thereof even though temporary would have lifted consumers'
Leisure and Entertainment sub-sector within this space is also
likely to benefit from the upcoming holiday season. "Leisure
Service" is # 1 on the Zacks 'M' Industry Rank list as of now and
"Other Consumer Discretionary" is #3.
Launched in June 2005, PEJ the tracks Dynamic Leisure and
Entertainment Intellidex Index.
The index is comprised of 30 US leisure and entertainment
companies selected on the basis of a variety of investment merit
criteria, including: price momentum, earnings momentum, quality,
management action, and value.
Top holdings include Chipotle, Time Warner, Liberty Media,
Priceline and Starbucks. Restaurants (43%), Broadcasting (15%),
and Movies & Entertainment (13%) are among the top
The fund charges slightly higher fees of 63 basis points per year
but it has been outperforming its peers.
PEJ is a Zacks rank #1 (Strong Buy) ETF.
SPDR S&P Aerospace & Defense ETF (
Despite budget related worries, this small sector has been doing
very well this year, mainly due to strong momentum in the
commercial aviation market. "Aerospace & Defense" is
currently #10 (out of 62) on the Zacks M industry list.
Launched in September 2011, this product tracks S&P Aerospace
and Defense Select Industry index, which is a modified equal
This product has attracted AUM of $22.2 M so far. It holds 36
securities with weighted average market cap of $21 billion. It
charges 35 basis points in expenses and has a decent dividend
yield of 1.8% currently.
Boeing, Alliant Techsystems, Hexcel Corporation and Northrop
Grumman are the top holdings but being modified equal weighted,
the fund is pretty well diversified with the top holding
accounting for just 4.7% of total assets.
XAR is a Zacks Rank#1 (Strong Buy) ETF.
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SPDR-KBW REG BK (KRE): ETF Research Reports
PWRSH-DYN LE&EN (PEJ): ETF Research
SPDR-SP AER&DEF (XAR): ETF Research
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