ETFs For 3Q Earnings Season

The pandemic is making subsector selection critical for third-quarter earnings plays.

Reviewed by: Dan Mika
Edited by: Dan Mika

J.P. Morgan on Wednesday will kick off the next round of major corporate earnings covering the third quarter of the year.

Despite the delta variant driving up COVID-19 cases in the U.S. to heights not seen since prevaccine rollout levels and several volatile days on Wall Street, analysts expect the combined S&P 500 sectors to gain 24.4% in year-over-year earnings, according to a note from CFRA Research Chief Investment Strategist Sam Stovall.

Here are a few industries pegged to overperform or underperform, and how investors can use ETFs to play an earnings season filled with nuance.

Inflation To Boost Materials …

Out of the eight of the 11 sectors expected to see positive earnings growth, materials and industrials lead the anticipated growth with a consensus 91.5% increase estimate. The main driver for the sector is an inflationary environment driven by reopening demands, shipping bottlenecks and labor shortages.

Those nosebleed-level year-over-year growth estimates are inflated due to the pandemic cutting growth deeply in the same quarter last year, including steel, which is expected to have a 991% increase in earnings over the course of the last 12 months.

Although that figure would make the VanEck Steel ETF (SLX) seem like a good option, the fund posted a loss of 10.89% in the quarter, likely because of its exposure to a global supply chain in disarray.

CFRA also expects the materials sector to be boosted by a small group of firms, namely Nucor, Mosaic, Dow, LyondellBasell and Freeport-McMoRan, which are estimated to have year-over-year EPS gains from 177% to 1,030%.

The First Trust Materials AlphaDEX Fund (FXZ) has exposure to three of those five names, while the iShares U.S. Basic Materials ETF (IYM) carries more than 5% of its weight in two of those companies.

... And Hurt Discretionary

Although the spread of the delta variant curbed the full reopening Americans were hoping for earlier this spring, Stovall wrote that the leisure, hospitality and travel industries made some gains toward prepandemic levels, as did the retail apparel industry despite widespread delays to a return to the office.

But where the consumer discretionary sector will hurt the most is in auto manufacturing, where supply chain bottlenecks and rising costs in materials and labor are expected to produce a significant decline in sales volume from previously announced guidance. CFRA expects a year-over-year EPS decline of 93% for the quarter.

That would seem to spell trouble for the First Trust NASDAQ Global Auto Index Fund (CARZ), which lost 1.75% of its value during the last quarter despite an 8.5% weighting toward Tesla adding a bit of diversity from legacy automakers.

Real Estate Split On Prospects

While the consensus estimates for the real estate sector is a whopping 56.5% EPS gain year-over-year, the story will likely reflect the near-polar opposite fortunes of the industry’s subsectors during the pandemic.

Returns to the office that were planned for the fall were pushed back as a slowdown in vaccination rates and the spread of the delta variant caused a late summer spike in cases, and that is bound to affect broad market REIT ETFs.

However, industrial and single-family housing REITs stand to benefit respectively from the ongoing supply chain constriction and normalization of e-commerce. One of the purest ETF plays in industrial real estate is the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS), which concentrates almost 30% of its holdings in industrial REITs Prologis and Duke Realty and is outperforming several broad-based REIT funds.

Value Tipped To Beat Growth

Finally, CFRA expects the S&P 500’s value sectors to generate EPS growth of 23% against the 15.8% EPS gain tipped for the S&P 500 growth sectors.

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That’s a reversal of the pricing trends within those indexes during the third quarter. The iShares S&P 500 Value ETF (IVE) posted -0.94% in returns during the period, while the iShares S&P 500 Growth ETF (IVW) gained 1.77%.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Although information technology is expected to see EPS pace grow by 27.2% year-over-year against the 24.4% expected growth across the S&P 500, CFRA is expecting the semiconductor shortage to slow the tech sector’s growth through the final half of the year and into 2022.

Contact Dan Mika at [email protected], and follow him on Twitter

Dan Mika is a reporter for He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.