[The following "ETF Issuer Perspective" is sponsored by Invesco PowerShares]
It's been an interesting third quarter, marked by a significant uptick in market volatility, an August "flash crash" and an anticipated interest rate hike that didn't happen. Further, nine of the 10 sectors that make up the U.S. economy have seen returns decline through the third quarter, but half of those sectors managed to outpace the S&P 500 Index—underscoring weakness in the broader market.*
Here are a few trends to keep an eye on as we near the end of 2015.
- Strength in consumer discretionary stocks. Consumer discretionary stocks have been the clear winners thus far in 2015. Companies in this sector sell goods such as leisure apparel, textiles and luxury goods. Consumers tend to want these products more than they need them, and they can be a good indicator of consumer sentiment. The strength of consumer discretionary stocks is not surprising, given the strength of the labor market and lower gasoline prices.
- Weak commodities market. Commodity prices have been slammed by excess supply, sluggish global demand and significant corporate inventory overhang, and these trends have weighed down shares of energy and material providers. Looking forward, industry analysts have mixed views of the commodity markets. Some fundamental investors are displaying pessimism while others are more sanguine, revising earnings estimates upward.
- Corporate earnings environment. Equity returns have been hampered by a generally sluggish corporate earnings environment. Citigroup's earnings-revision index has been in a downward spiral since May. The four-week average of the index is at levels not seen since 2011 and, before that, the recession of 2008.* Earnings generally tend to pace stock prices and provide opportunities for investors. As you might expect, securities and sectors with the strongest earnings are likely to see the strongest relative performance potential.
- Corporate earnings outlook mixed, but positive. Looking ahead, analysts surveyed by Bloomberg as of Oct. 2, 2015 expect the strongest growth in 2016 to come from the consumer discretionary and health care sectors. Financials are expected to modestly underperform the market, as measured by the S&P 500 Index, while telecommunication services firms are expected to post the weakest earnings growth of the 10 sectors in 2016.
These are, of course, only estimates and trends. Earnings revisions and expected growth rates may mislead investors. Materials, for example, are expected to see strong earnings growth in 2016, even as earnings revisions are still declining. And while many industrial companies are seeing their earnings estimate revisions stabilize, the sector is still expected to see earnings growth in 2016—albeit below that of the S&P 500 Index.
Launched on Oct. 9, the PowerShares DWA Tactical Sector Rotation Portfolio (DWTR) may provide an ETF solution for investors looking to capture returns in sectors with strong momentum, but who are uncertain about how to read dynamic fundamentals. The PowerShares DWA Tactical Sector Rotation Portfolio (the "fund") is based on the Dorsey Wright® Sector 4 Index (Index). The fund generally will invest at least 90% of its total assets in securities that comprise the Index. The fund is a "fund of funds," meaning that it invests its assets in the shares of other, underlying exchange-traded funds eligible for inclusion in the Index, rather than in securities of individual companies. The Index is designed to gain exposure to the strongest relative strength sectors in the U.S. through the universe of nine PowerShares DWA sector Momentum ETFs. The fund and the Index are evaluated monthly for potential rebalance and reconstitution.
*Bloomberg L.P., Sept. 30, 2015