6 ‘Smart Beta’ ETFs For Earnings Season

July 18, 2014

What’s better, an ETF weighted for earnings, or for revenues?

“Smart beta” ETFs are all the rage these days, and those with a taste for such next-generation index investing can go beyond cap-weighted indexes and look for funds that screen securities for earnings and revenues served up by WisdomTree and RevenueShares.

Early reports so far point to positive earnings growth in the second quarter. The S&P 500 Index has reached new highs in the quarter after rough winter weather dampened growth early in the year. But the recovery appears to be continuing, which is helping earnings.

“Seventy-seven percent of the 82 companies in the S&P 500 that have posted results this earnings season beat analysts’ profit projections, and 70 percent exceeded sales estimates,” said Sumit Roy, managing editor of Hard Assets Investor, citing Bloomberg data.

Investors analyzing financial results are looking at revenues and earnings. Earnings have been pumped up in recent years by cost cuts, but as the job market improves revenue growth will spill down and fuel increasing amounts of earnings growth as well. So. from an ETF investor perspective, is an ETF that screens for earnings better, or is one that screen companies for revenues?

“Both could be valid approaches,” said Spencer Bogart, an ETF analyst at ETF.com. “The entire idea behind this type of alternative weighting is to say ‘let’s stop using market capitalization (which relies on stock price) to determine the relative size of companies, because market price itself is subject to emotional swings from investors.”

Top Or Bottom?

Revenue is often referred to as the “top line” and is the company’s gross profits, while earnings are called “bottom line,” which refers to the company’s net profits.

As noted, WisdomTree and RevenueShares currently offer investors samples of their own brands of earnings and revenues-focused ETFs, respectively. They are organized around size of companies, allowing for one-to-one comparisons. They are:

WisdomTree’s suite of earnings-focused ETFs:

RevenueShares’ suite of revenue-focused ETFs:

WisdomTree’s ETFs are self-indexing funds, while RevenueShares’ ETFs are based off of S&P indexes. It’s also interesting to note that performance results are mixed this year for investors who have chosen one set of funds over the other.

So let’s get into the comparison:

1) Large-Cap ETFs: EPS Vs. RWL


Year-to-date, WisdomTree’s EPS is up 8 percent, while RevenueShares’ RWK has gained about 7 percent. EPS currently has large-cap stocks such as Apple, Exxon and Microsoft as its biggest holdings, while RWL’s top holdings are Walmart, Exxon and Chevron.

EPS has an expense ratio of 0.28 percent, or $28 for every $10,000 invested, while RWL’s expense ratio is 0.49 percent.


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