The Top ETFs to Watch for the Week of July 11-15 (IYG, XLF, VFH, KBE, FDN, IYW, XLK, QQQ, HHH, PBJ, XLY, GDX, GDXJ, IJR)

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Earnings season hits the ground running later today when Alcoa Inc. reports second quarter earnings. We have already posted a preview of other top earnings coming this week.  Now we’re watching several ETFs and investor reaction to the coming week’s earnings. These include iShares Dow Jones US Financial Services ETF (NYSE: IYG), Financial Select Sector SPDR (NYSE: XLF), Vanguard Financials ETF (NYSE: VFH), SPDR KBW Bank (NYSE: KBE), First Trust Dow Jones Internet Index (NYSE: FDN), iShares Dow Jones US Technology ETF (NYSE: IYW), Technology Select Sector SPDR (NYSE: XLK), PowerShares QQQ (NYSE: QQQ), PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ), Consumer Discretionary Select Sector SPDR (NYSE: XLY), Market Vectors Gold Miners ETF (NYSE: GDX), Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), and iShares S&P SmallCap 600 Index (NYSE: IJR).

How much influence do individual company earnings have on an ETF? A reasonable guess may be “not much” because most ETFs hold a diverse bundle of stocks and no single stock should move the fund a lot. But that doesn’t account for the predictive and psychological impacts of a very good (or a very poor) earnings report from a particular company. And in sector-specific funds an early report often sets the tone for investor sentiment. Last week’s solid same-store sales reports, for example, boosted several retail-heavy ETFs to new 52-week highs.

In the financial sector, both JP Morgan Chase, which reports earnings on Thursday, and Citigroup, which reports on Friday, are well represented in the iShares Dow Jones US Financial Services ETF (NYSE: IYG) and the Financial Select Sector SPDR (NYSE: XLF). IYG holds nearly 12% of its assets in Chase and another 9.3% in Citi. XLF maintains nearly 8.9% of its assets in XLF and another 6.7% in Citi. We think that Citi will be a bellwether for the entire financial sector and that Chase could send the financials soaring if the bank raises it guidance.

Vanguard Financials ETF (NYSE: VFH) and SPDR KBW Bank (NYSE: KBE) hold nearly 9% of assets in Chase and more than 7% of assets in Citi, respectively. Together with IYG and XLF, all four of these ETFs are likely to respond strongly to the Chase and Citi earnings reports.

Google reports earnings on Thursday and the company’s stock accounts for about 8.5% of the assets in the First Trust Dow Jones Internet Index (NYSE: FDN). The iShares Dow Jones US Technology ETF (NYSE: IYW) holds 5.9% of its assets in Google stock and the Technology Select Sector SPDR (NYSE: XLK) holds 5.21% of its assets in Google as well. Even the massive PowerShares QQQ (NYSE: QQQ) holds more than 5% of its $24 billion in assets in Google stock. Google’s earnings always have an impact on the entire internet sector and the company’s influence in these ETFs will reflect that.

One internet ETF that does not hold any shares in Google is the Internet HOLDRS (NYSE: HHH), which got its start before Google became a public company and does not add new components to its original holdings. Regardless of that omission HHH, with nearly 44% of holdings in Amazon alone, will likely react to Google’s earnings in the same way as the other technology ETFs.

The PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ) holds about 5% of its assets in the shares of Yum! Brands, which reports on Wednesday. Yum!’s earnings indicate the direction for the entire fast food and casual dining segment in the US, and perhaps more important, in China. Chinese inflation has now topped 6% and that could have a sobering effect on dining out among Chinese consumers as well as on other discretionary consumption in the country.

Yum! also comprises nearly 2% of assets of the Consumer Discretionary Select Sector SPDR (NYSE: XLY). Another portfolio stock, Marriot International, also reports earnings next week. A key number to watch for in Marriott’s report is its revenue per available room, which the company expects to rise by 6%-8% compared with the first quarter.

Neither the Market Vectors Gold Miners ETF (NYSE: GDX) nor the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) holds any shares in NovaGold Resources, but because the Canadian firm is the first gold miner to report earnings (Wednesday) it will be closely watched. NovaGold’s shares have been widely sold-off along with many peers and while it may appear to be a value choice, the company has some deep problems.  Analysts are expecting an EPS loss of -$0.10 on nearly invisible revenue. In a rational world nothing that happens with NovaGold should have any effect on either GDX or GDXJ, but sometimes general interest in gold trumps rationality.

The iShares S&P SmallCap 600 Index (NYSE: IJR) makes this week’s watch list not so much for being tied to earnings as for the fact that the fund’s shares posted an all time high of $75.81 last week. Cubist Pharmaceuticals, which reports on Thursday, is included in the fund’s holdings, but at less than 0.5% of assets Cubist shouldn’t have much impact on a fund with 600 stocks in its portfolio. Still, Cubist is one of the top three performers in IJR’s portfolio, likely on possible interest in Cubist as a takeover target. A good report from Cubist could put a jolt into IJR.

Paul Ausick

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