Earnings Or Revenue-Weighted ETFs: Q3 Winners

We are in the midst of a full-blown earnings season. Out of the 327 members from the S&P 500 index that have reported already, 74.9% beat on bottom line and 65.7% surpassed revenue estimates, per the Earnings Trends issued on Nov 1, 2017. Ongoing positive revenue momentum and favorable revisions in estimates for the current period are most notable factors.

Sequential earnings growth appears relatively weak (from 11.2% in Q2 to 5.6% in Q3), but top-line momentum continues. As of Nov 1, 2017, expected revenue growth for Q3 is 5.5%, same as that of Q2.

As of now, as much as 65.4% of the S&P 500 companies have reported earnings, with a 7.8% year-over-year jump on 6.5% revenue growth. Against such an earnings and revenue backdrop, let’s find out the ETFs — earnings or revenue-weighted — that were in the spotlight in the Q3 reporting cycle.

Oppenheimer Large Cap Revenue ETF (BE:RWL) Versus WisdomTree U.S. Earnings 500 Fund (TO:EPS)

RWL: Stocks in the fund are graded on the basis of top line. The top three holdings of the fund are Wal-Mart (NYSE:WMT) (4.9%), Apple (NASDAQ:AAPL) (2.2%) and Berkshire Hathaway (NYSE:BRKa) (2.2%). Consumer Cyclical (15.9%), Health Care (15.6%) and Financials (14.2%) are three of the leading sectors. The fund charges 39 bps in fees (read: Tap Q3 Growth with Revenue-Weighted ETFs).

EPS: It offers exposure to U.S. large cap companies that are profitable. The top three stocks are Apple (6.35%), Berkshire Hathaway (2.39%) and Alphabet (NASDAQ:GOOGL) Inc-Cl A (2.25%). The fund charges 28 bps in fees. IT (23.41%), Financials (19.78%) and Health Care (13.33%) round out the top three sectors (read: Hurricanes Impact on Earnings ETFs?).

Oppenheimer Mid Cap Revenue ETF RWK Versus WisdomTree U.S. MidCap Earnings Fund (SNX:EZM)

RWK: The same revenue-weighted objective is applied here on the mid-cap level. Tech Data Corp. (2.25%), AutoNation Inc (NYSE:AN). (1.85%) and Arrow Electronics Inc. (1.85%) are the top three stocks. The fund charges 39 bps in fees. Consumer Cyclical (18.5%), Information Technology (17.0%) and Industrials (17.0%) are the top three sectors of the fund.

EZM: In this mid-cap earnings-focused ETF, USG Corp (1.28%), First Solar (NASDAQ:FSLR) (1.11%) and Pilgrim's Pride (0.93%) hold the top three spots. Industrials (21.3%), Consumer Discretionary (18.3%) and Financials (15.8%) are three of the leading holdings in the fund. The fund charges 38 bps in fees.

Oppenheimer Small Cap Revenue ETF RWJ Versus WisdomTree U.S. SmallCap Earnings Fund EES

RWJ: This small-cap revenue-weighed fund holds INTL. FCStone, Inc. (3.02%), Core-Mark Holding Co. Inc. (1.99%) and Group 1 Automotive Inc. (1.65%) as its top three holdings. Consumer Discretionary (28.2%), Industrials (22.2%) and Information Technology (11.2%) are the leading sectors of the fund. The expense ratio of the fund is 0.39% .

EES: This earnings-weighted fund’s top three holdings are Meritor Inc. (3.41%), Premier Inc. (1.19%) and American A'le & Manufacturing (0.91%). The fund charges 38 bps in fees. Consumer Discretionary (22.8%), Industrials (21.3%) and Financials (21.0%) are the leading sectors of the fund (read: 5 ETFs to Buy and Hold for 5 Years).

Bottom Line

From the chart given above, we can see that the performance of the revenue-weighted ETFs lagged earnings-weighted ETFs. This could be due to the fact that the revenue beat ratio and growth rate still lag the earnings growth and beat ratio, though revenue momentum is in the right direction.

Another notable feature this earnings season is that large-caps are having an upper hand over the smaller ones, be it for revenues or earnings. Buoyancy in the global economy, a still-subdued dollar and hopes of tax cuts have made this trend possible.

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