Sweta Killa: The broad market has been seeing rough trading over the past few days as stretched valuations and earnings warnings dampened investor mood.
The earnings season commenced with apprehensive investors predicting that most of the sectors will falter on earnings growth. This is especially true given that the earnings for the S&P 500 are projected to be down 4.0% year over year on 1.3% higher revenues and modestly lower margins, as per the Zacks Earnings Trends.
Earnings estimates have fallen sharply over the past three months from 2.1% growth projected in January. The weakness is broad based with 10 of the 16 Zacks sectors expected to show earnings decline. Among the major sectors, finance, technology, energy, medical and basic materials will likely suffer the most.
The culprits are mostly large scale, including soft global economic fundamentals such as escalating tensions in Russia, prospect of interest rate hike sooner than expected in the U.S., persistently low inflation in developed economies and higher borrowing cost in emerging markets.
Given this uncertain environment, investors seeking to protect themselves from downside risks should invest in baskets of stocks with solid value fundamentals. This could be easily done by looking into bargain ETFs, which offer lower risk compared to selecting individual stock.
For those investors, we have found some bargain ETFs that have Price/Trailing Earnings ratio of less than 15, Price/Book Value ratio of less than 1.5 and expense ratio of less than 0.50% with the help of fidelity.com screener. These funds also have top Zacks Rank of ‘1’ or ‘2’, suggesting outperformance in the coming months.
Below, we have highlighted three such funds that have the potential to move higher than the others heading into this earnings season:
RevenueShares Financial Sector Fund (NYSEARCA:RWW)
This product targets the broader U.S. financial sector and follows RevenueShares Financial Sector Index. It offers exposure to about 81 stocks that are weighted by revenues instead of market capitalization. Berkshire Hathaway occupies the top position at 13.34% in the basket while other firms hold less than 7.26% (read:Forget Cap Weighted ETFs and Buy These Funds Instead).
In terms of industrial exposure, bank and insurance make up for the top two sectors at 33% and 31%, respectively, while financials services, investment companies and asset management round off to the top five. The fund is unpopular and illiquid with AUM of nearly $31 million and average daily volume of 4,000 shares. Expense ratio came in at 0.49%.
The fund is trading at P/E of 13.54 and P/B of 1.15 and lost over 1% so far this year. The ETF has a Zacks ETF Rank of ‘1’ or ‘Strong Buy’ with a ‘High’ risk outlook.