Two ETFs To Buy and One To Avoid This Week
Earnings season jumps into full swing this coming week as Amazon (AMZN), Facebook (FB), Alphabet (GOOG) (GOOGL), Twitter (TWTR), Visa (V), Mastercard (MA), AMD (AMD), PayPal (PYPL), Intel (INTC), AT&T (T), Verizon (VZ), Gilead (GILD), McDonald's (MCD), Boeing (BA), Abbvie (ABBV), Coca-Cola (KO) and ExxonMobil (XOM) all report quarterly results. According to FactSet, Q2 is off to a strong start. While it’s still early in the season, S&P 500 corporate earnings are on pace for 21% year-over-year growth, which would be the highest since 2010. So far, 87% of companies have beaten earnings estimates, while 77% have beaten revenue estimates.
I expect companies will continue to report solid Q2 results thanks to the tailwinds of corporate tax reform, strong economic growth and improved consumer spending. On the other hand, much of those expectations are already baked into stock prices and few companies have been raising forward guidance. Last week, we saw volatility in names like Netflix (NFLX), Goldman Sachs (GS) and General Electric (GE), but the market as a whole reacted with a collective shrug. Given the companies that are reporting this week, I expect volatility to pick up but perhaps not to above average levels unless we get a string of disappointing results.
Here are three trades you may want to consider as we head into the coming week.
Buy: First Trust Dow Jones Internet ETF (FDN)
FDN has been having a phenomenal 2018 (it’s up 31% on the year so far) but the good times may not be over yet. With 37% of assets invested in the combination of Amazon, Facebook, Alphabet, Twitter and PayPal, it is uniquely positioned to bounce strongly if these companies report solid results this week.
Of the group, Facebook and Alphabet have me the most concerned as the specter of increased regulatory oversight could hamper future growth, although some think it could actually help. Google will also take a $5 billion charge in Q2 related to the EU antitrust fine. At this point, traders have shown very little hesitation in continuing to buy these names despite any perceived short-term pressures and I expect will see a continuation of that trend this week.
Buy: Communication Services Select Sector SPDR ETF (XLC)
This is sort of a different play on the same theme. XLC is only about a month old, the product of the upcoming GICS reclassification which will create the new sector made up of communications, internet and consumer discretionary names. And it may have as much exposure to this week’s earnings as any ETF out there.
A full two-thirds of the fund’s assets are represented by companies who are reporting earnings this week. XLC has 24% of assets in Alphabet and another 21% in Facebook making it one of the most top-heavy ETFs around. Additionally, it has large stakes in Comcast (CMCSA), Electronic Arts (EA), Verizon and AT&T, all of which are reporting this week.
Whether you want to go with FDN or XLC is really dependent on how you feel about the Facebook/Alphabet pair (a 19% weighting in FDN vs. a 45% weighting in XLC) and whether you want exposure to Amazon (a 10% weighting in FDN vs. no position in XLC).
Avoid: InfraCap MLP ETF (AMZA)
There are reasons for optimism if you own MLPs. The energy sector has been improving as oil prices are up, oil companies ramp up production and many energy-related businesses are poised to deliver strong earnings and revenue growth. On top of that, the news came down last week that the Federal Energy Regulatory Commission ruled that it will “facilitate the pass through of the tax reductions provided by the Tax Cuts and Jobs Act signed into law on December 22, 2017, and ensure natural gas pipeline rates remain just and reasonable.” This development sent much of the MLP group rallying last week.
But not all MLP ETFs are created equal. Yield seekers have no doubt been enticed by AMZA’s yield of more than 20% earlier this year, but there are a lot of red flags here. For one, AMZA’s distribution schedule went from $0.52 per quarter to $0.11 per month, essentially amounting to a 30% distribution cut. For another, much of AMZA’s distributions lately have been returns of capital. While those satisfy the needs of those looking for regular distributions, they’re harmful to the fund’s NAV, which has dropped 70% over the past five years.
There is a fair amount of discussion regarding whether the current distribution rate is covered by income or is not. If you’re looking to dip your toes into MLPs anticipating a rally, AMZA would not be my choice. I’d stick with higher-rated MLP ETFs, such as the Alerian MLP ETF (AMLP), the largest in the group, or the First Trust North American Energy Infrastructure ETF (EMLP) instead.
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