PANW, NVDA Earnings Validate, Again, Case for ETFs

Stop me if you’ve heard this one before. You’re an advisor and it's the season that comes four times a year—the kind of thing you can't swap with Christmas.

Of course I’m referring to earnings season. We are near the tail end of the first one of 2024. As usual, many advisors find themselves in uncomfortable positions, whether they directly manage client money or not. Because with all the great wealth planning advisors do, they still need to guide many clients through the complex web of this inanimate object called “the market.”

This past week reminded us that earnings season is a barometer for advisor emotions. Whether it's the feeling you missed a big surge in some tech stock or you caught the wrong end of a spike down in price, this time of year is uneasy. Because unlike the financial planning process, you don't have much control over what happens. The best laid plans, as they say. 

This earnings season was no different. In fact, it might have been one of the tougher ones. Depending on the day, one Magnificent Seven stock could have even taken a moderate risk portfolio up or down a few percentage points in a week. As of late in the day on Thursday, the Invesco QQQ Trust ETF (QQQ) was up 7% year to date. That’s 1% a week to start the year! 

PANW, NVDA Earnings 

Meanwhile, it’s fund family cousin, the Invesco Russell 1000 Equal Weight ETF (EQAL) is still slightly down for the year. QQQ trades at more than 31 times trailing 12-month earnings per share, while EQAL checks in at just over half that. QQQ sells at 4.5 times trailing sales, more than thrice that of EQAL. 

A handful of stocks are handing it to the rest, so to speak. But as an advisor, we were always taught that diversification was the only “free lunch” in investing. That lunch has gone up in price at a faster rate than a Big Mac meal, which reportedly sells for about $18 in an upscale area of Connecticut.

Projections of earnings growth for the current market favorites is astronomical. But projections in wealth plans can’t be. Advisors can’t afford that. And if you are old enough (like me) to remember when there were some in the industry going to clients with 15% long-term portfolio growth projections, you can be forgiven for hearing echoes of that again now. Twenty-five years later, the stock market is as in vogue as at any point we can remember. 

Whether the euphoria of Thursday’s Nvidia Corp. inspired rally was a new giant breakout for the Mag Seven, or a FOMO moment that soon reverses itself, the one constant at times like these is that clients have questions. 

This is where ETFs can either blend into a stock and bond portfolio or become the main attraction of your investment process. The ideal example of why advisors might consider this is the recent case of Palo Alto Networks Inc., which closed Tuesday around $366 and opened Wednesday at $275 before closing at $261. That can happen to any stock at any time if that time is earnings season. 

Which is why holding large positions in single stocks is so much more of a double-edged sword than it was even five years ago. The markets are driven by algorithms, indexers and other new dominant forces that make concepts like “fair value” a myth, at least for the time being. 

One answer is to surround those potentially vulnerable positions (which could be all of them) with some cushioning. 

ETF Cushioning

ETFs provide that if you do your research to know what you own. For instance, I used etf.com’s handy tool to find out which funds have a solid slug of PANW, with plenty of diversification around it. I found that the stock is held in more than 300 ETFs, but that a decent-sized pair of funds, the Amplify Cybersecurity ETF (HACK) and the Nasdaq Cybersecurity ETF (CIBR) each own about a 6% position in PANW, but try to cut single-stock risk in that industry through the ETF basket structure. 

For advisors, ETFs could be the difference between disappointment and panic, especially during earnings season. Because unlike Christmas, it comes four times a year. So perhaps it makes sense to just go what obviously works best.