Tap Q3 Growth With Revenue-Weighted ETFs

The overall Q3 earnings picture for the S&P 500 looks weak with projected earnings growth of 2.3% after double-digit growth in each of the first two quarters of the year. Additionally, earnings growth in the last quarter of the year is expected to be in high single digits. Expected Q3 revenue growth of 5% is also lower than growth of 5.5% in Q2 and 7.6% in Q1 as well as 6.2% projected growth for Q4. This indicates Q3 growth on track to be the lowest of this year.

While only half of the sectors are expected to post positive earnings growth this season, revenue growth are widespread with just auto sector set to post revenue decline. Against this backdrop, revenue-weighted ETFs will likely take lead over earnings-weighted strategies and could be the potential outperformer this earnings season.

Why Revenue-Weighted ETFs?  

First, while a series of headwinds might weigh on the profitability of companies, the decline in dollar could offer some relief to the top line. As such, many companies could come up with unexpected growth in revenues in their quarterly reports, giving a boost to revenue-weighted ETFs. Though the ICE U.S. Dollar index, a measure of the dollar’s strength against a basket of currencies, showed immense strength in September, it is down nearly 2.4% in the last three months.

Second, revenue-weighted funds have outperformed the earnings counterparts from both the short and long-term periods, proving the credibility of the superior-weighting methodology. This is because revenues are a better indicator of a company’s financial health. The top line is harder to manipulate or alter on a quarter-by-quarter basis as opposed to earnings that can easily be fattened using accounting tricks thereby leading to inaccuracy.

As a result, tilting toward the revenue metric is a more sensible choice. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplish this task. Below, we have highlighted the funds that could be great choices for investors seeking to make money from the weak earnings of this year while at the same time focus on one of the most important aspects of stock investing.

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