ETF Winners And Losers From First Week Of Earnings Season

by on July 18, 2010 | ETFs Mentioned:

Heading into the second half of the year, investors are divided over where global financial markets are headed. There is no shortage of bears, who point to depressing unemployment and consumer confidence figures as evidence that the recovery is quickly losing momentum (or perhaps never really had any in the first place). Others believe that the storm clouds over Europe are beginning to clear, and that sustained economic expansion in the emerging markets will be a catalyst to global growth.

Against this uncertain backdrop, investors welcomed yet another highly important earnings season last week. Most Wall Street analysts expected corporate earnings to show a healthy increase from last year, when the economy was still mired deep in a recession. An impressive show in second quarter earnings could strengthen the argument that the U.S. recovery continues to plod along, despite weakness in overseas markets. On the other hand, a run of disappointing numbers could send investors flocking to safe havens [see Five Safe Haven ETFs].

Because most ETFs offer exposure to a well-diversified basket of securities, the direct impact earnings reports on any one fund is muted. But earnings calls from bellwether companies often offer insight into the outlook for an entire industry, and can shed some light on how certain corners of the economy can be expected to perform going forward.

A number of companies worthy of the “bellwether” tag kicked off earnings season this week, including Pfizer, Intel, Google, Citigroup, and Bank of America. Some reported impressive results and issued bullish outlooks, giving a boost not only to their stock but to ETFs covering the related industry. Others disappointed the Street, some with historical results and some with forward-looking expectations. Below, we profile the ETF winners and losers from the first week of a critical earnings season, perhaps sparking some ideas for trend-following investors.

Loser: Financials

Bank of America and Citigroup reported earnings last week, with both financial behemoths beating analyst estimates on earnings. But both big banks came up short in the revenue column, which prompted investors to worry about the ability of the financial sector to generate growth going forward. Bank of America also announced that it expects a multi-billion hit from the recently-approved regulatory overhaul, spooking investors who have already seen other corners of the economy impacted by new legislation in recent months.

Citi and BofA both plunged on Friday, with shares losing about 6% and 9%, respectively. Also hit hard by the depressing outlooks was the iShares Dow Jones U.S. Financial Services Index Fund (IYG). This ETF has heavy allocations to both battered financial giants; Bank of America makes up about 13% of the fund and Citigroup accounts for another 6%.  The other holdings of IYG include companies that figure to be in the same boat as Citi and BofA, creating some strong headwinds for this financial ETF [see all ETFs in the Financials Equities ETFdb Category].

Loser: Internet

At first glance, Google’s earnings report this week was truly impressive. Revenues were up 24% from the previous quarter, and net income jumped accordingly. Despite the stellar absolute figures, the company failed to meet the projected earnings of $6.52 per share (Google finished Q2 with EPS of $6.45), dealing a blow to the company’s stock; Google’s share price was stunted by roughly 6.4% after reporting Q2 earnings [see China Tech ETFs In Focus As Google Drama Plays Out].

The First Trust DJ Internet Index Fund (FDN) tracks the Dow Jones Internet Index, a benchmark that consists of companies that generate at least 50% of their revenues from the Internet. Not surprisingly, Google top’s the list of FDN’s holdings, making up nearly 9% of assets. GOOG’s miss was bad news for FDN, as it sparked worries that other big components, such as Amazon, eBay, and Yahoo!, are also struggling to generate growth.

Winner: Semiconductors

Intel was one of the brightest spots of the week, reporting earnings that shattered expectations. The company, which was expected to generate earnings of $0.43 per share, turned in EPS of $0.51, prompting¬† CEO Paul Otellini to declare “the best quarterly results ever. ” Though the demand for personal computers has slowed, semiconductor companies have found new revenue streams that have enabled the industry to stage an impressive comeback since being battered during the recent recession [see Semiconductor ETFs In Focus As Chip Sales Skyrocket].

The HOLDRS Merrill Lynch Semiconductor (SMH) is one of several funds offering exposure to the semiconductor industry, and Intel accounts for nearly a quarter of total fund assets. SMH surged on news of Intel’s impressive earnings, as investors took the news as further evidence that this industry has turned the corner and put the recession behind it. SMH is made up of 18 semiconductor producers, with a focus on primarily giant and large cap firms [see SMH's technicals here].

Loser: Food & Beverage

Yum! Brands operates and licenses Taco Bell, KFC, Pizza Hut, Wingstreet, Long John Silvers, and A&W Restaurants across the world, totaling over 36,000 establishments. Though the company beat estimated earnings, investors were scared off by a gloomy outlook for the rest of 2010. The company expects its earnings for the year of 2010 to fall short of Wall Street estimates, with the shortfall partially attributable to rising labor costs in China; the Chinese division of Yum! makes up nearly 35% of profits.

PowerShares Dynamic Food & Beverage (PBJ) has Yum! as its top holding, making up 5.73% of the ETF. Among the other big allocations are companies that could face similar challenges, such as McDonald’s and Starbucks [see more at Does Your Portfolio Have A Craving For PBJ? ]. It would be premature to say that the food and beverage industry faces a tough road ahead, but the first week of earnings season certainly didn’t provide any positive surprises [see PBJ's fundamentals here].

TBD: Pharma

Pfizer reported early in the week that net profit, net sales, and revenues all grew during the second quarter of this year, posting what most investors described as modest improvements. Though growth was not astronomical, any expansion in the current environment is a positive sign. Even more positive: Pfizer also gave a strong outlook for the remainder of 2010.

HOLDRS Merrill Lynch Pharmaceutical (PPH) holds Pfizer as its third highest security, giving the company a 16.5% allocation. The fund stays almost entirely in the U.S. and has a major focus on giant market capitalization firms (see all of PPH’s holdings here). PPH saw gains after Pfizer put in its healthy outlook on the year, as well as a successful quarter. Look for upcoming reports from other Big Pharma firms to give this ETF more direction.

Disclosure: No positions at time of writing.