ETF Positioning For The End Of the Correction

With the S&P 500 surging nearly 10 percent over the past month, that is probably enough for many market participants to say the third-quarter correction has evaporated.

Clearly S&P 500 index funds and rival broad market exchange traded funds are benefiting from upside in the benchmark U.S. equity index, but with the fourth quarter historically kind to U.S. equities, now could be the time for investors to consider alternative approaches to broad domestic equity exposure. The aptly-tickered WisdomTree Earnings 500 Fund EPS is one place to start.

As its name implies, EPS weighs its nearly 500 components by earnings, meaning a company needs to be consistently profitable to qualify for admission to this ETF. EPS tracks the WisdomTree Earnings 500 Index (WTEPS), which “is a fundamentally weighted index that measures the performance of earnings-generating companies within the large-capitalization segment of the U.S. Stock Market. Companies in the index are incorporated and listed in the U.S and have generated positive cumulative earnings over their most recent four fiscal quarters prior to the index measurement date,” according to WisdomTree. 

Although there has been talk of an “earnings recession,” EPS is up more than nine percent over the past month and the ETF's utility increases as investors buy into the notion that third-quarter swoon was not the start of a new bear market for stocks.

“Short of a debt default, I don’t believe the 10% decline this summer will be the start of a new bear market. Although the market is currently trading at a forward price-to-earnings (P/E) ratio of 16—higher than its historic average—I believe the current mix of low interest rates, low unemployment, healthy consumer confidence and consistently strong consumer spending remains supportive of further market gains. The forces that have propelled U.S. equity gains these past five years—stock buybacks, dividend yield and dividend growth—remain in place, even in the face of current lackluster sales and earnings growth,” said WisdomTree Chief Investment Officer Luciano Siracusano in a note out Tuesday. 

Sector weights in EPS highlight the ETF's leverage to earnings growth. For example, the materials sector's earnings growth is expected to be anemic while utilities companies are usually lethargic in the earnings growth department. Additionally, consumer staples stocks, though residing near all-time highs, could very well reiterate their vulnerability to the strong dollar. Those three sectors combine for just 14.9 percent of EPS' weight.

Conversely, financial services, technology and consumer discretionary names are expected to be relatively stout growers of per share earnings, in addition to leading the charge on the buyback and dividend fronts. Those three sectors combine for over half of the sector lineup in EPS.