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Earnings Plays for ETF Investors

With nearly one-fifth of its portfolio dedicated to the duo (Wells, JP) on tap, the Financial Select Sector SPDR (XLF) may seem like the obvious choice. However, in the past we have seen this type of top-heavy exposure create headaches. Given the struggling performance of the financial sector in recent quarters, a more-diversified play may be the better option here.

The SDPR S&P Bank ETF (KBE) casts a wide net over the financial sector, spreading its exposure across a group of 40 institutions varying in size and influence. The fund's assets are well-distributed; no single holding accounts for more than 3% of the portfolio. JPM and WFC can be found within the fund's top-10 list. However, the two firms' combined stake is less than 6%.

Looking ahead, macroeconomic factors will continue to influence the ebb and flow of investor sentiment. These are not the only issues to keep in mind when constructing a game plan, though.

Throughout the opening months of 2012, the focus had largely been geared toward the global macroeconomic landscape. Initially, improving conditions in the E.U. and encouraging data from the U.S. were enough to propel major stock market averages along a largely uninterrupted upward trajectory. Unfortunately, as the rally continued and matured, the data began to show some signs of deterioration.

China slowdown fears have been thrust into the spotlight, while troubles in nations like Spain have begun to reignite sovereign debt concerns in Europe. Even the U.S. data, which have been a bastion of strength and stability, have stumbled a bit lately; Friday's disappointing nonfarm-payrolls reading capped an already-shaky week of announcements and data.

Investors should watch closely to get a feel for how companies are faring in the current market environment. Ultimately, caution is still warranted. Investors will be barraged with data in the weeks ahead. Be sure to avoid letting this deluge of information cloud your judgment.

Market Preview: Hitting Pause

Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion Money Management held no positions in equities mentioned.
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KBE $33.65 2.19%
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