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Healthcare ETFs in Focus Following JNJ Q2 Results

Sweta Killa
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The Q2 earnings season has commenced and Johnson & Johnson JNJ was the first drug company to report on Jul 17, before the opening bell. The world's biggest maker of health care products continued its long streak of earnings beat and outpaced the estimate on the revenue front. However, it trimmed its outlook for 2018.

Earnings per share came in at $2.10, four cents ahead of the Zacks Consensus Estimate and 14.8% higher than the year-ago quarter. Revenues grew 10.6% year over year to $20.83 billion and edged past the Zacks Consensus Estimate of $20.21 billion. Robust results were driven by double-digit growth in the pharmaceutical business and strong sales momentum in the medical devices business. In particular, robust sales of Simponi, Stelara, Prezisa/TMC, Concerta, Invega, Darzalex, Imbruvica and Zytiga drove the results.

For 2018, Johnson & Johnson reduced its revenue guidance to $80.5-$81.3 billion from $81-$81.8 billion, citing a strong dollar. Further, it also narrowed its earnings per guidance range to $8.07-$8.17 from $8.00-$8.20. The midpoints of the new guidance are well below the Zacks Consensus Estimate of $81.4 billion for revenues and $8.12 for earnings (see: all the Healthcare ETFs here).

Market Impact

Shares of JNJ were up 3.5% to close on the day. Currently, the stock has a Zacks Rank #3 (Hold) and VGM Score of B. However, Johnson & Johnson belongs to a bottom-ranked Zacks industry Rank (bottom 32%).

As a result, investors should closely watch the movement of the stock and keep a close eye on ETFs having double-digit allocation to this diversified drug maker. Below, we have highlighted these.

iShares U.S. Pharmaceuticals ETF IHE

This ETF provides exposure to 43 companies that manufacture prescription or over-the-counter drugs or vaccines by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Of these, Johnson and Johnson takes the top spot, accounting for 10.2% share. The product has $385.4 million in AUM and charges 44 bps in fees and expenses. Volume is lower as it exchanges about 17,000 shares a day. The fund has a Zacks ETF Rank #3 with a High risk outlook (read: Play the Best Sector of Summer With These ETFs & Stocks).

Health Care Select Sector SPDR Fund XLV

The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $16.5 billion in its asset base and trades in heavy volume of around 9.2 million shares. Expense ratio comes in at 0.13% annually. In total, the fund holds 63 securities in its basket, with JNJ taking the top spot at 9.9% of the assets. Pharma accounts for 30.7% share from a sector look while healthcare providers and services, healthcare equipment and supplies, and biotech have double-digit exposure each. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares U.S. Healthcare ETF IYH

This fund offers exposure to 120 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s returns with 9.3% of total assets. In terms of industrial exposure, pharma takes the top spot at 29.6%, followed by biotech (20.6%), and healthcare equipment (20.2%). The product has amassed nearly $2 billion in its asset base while charges 44 bps in annual fees. It trades in a good volume of around 80,000 shares a day and has a Zacks ETF Rank #2 with a Medium risk outlook (read:  Want to Tap Merger Mania? Play Top-Ranked Health Care ETFs).

iShares Evolved U.S. Innovative Healthcare ETF IEIH

This actively managed ETF employs data science techniques to identify companies with exposure to the innovative healthcare sector. Holding 189 stocks in its basket, JNJ is the top firm with 9% allocation. The product has accumulated $5.2 million in its asset base and trades in a meager volume of 1,000 shares per day on average. It charges 18 bps in annual fees.

Vanguard Health Care ETF VHT

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 378 stocks in its basket. Of these, Johnson & Johnson occupies the top position with 10.2% allocation. Pharma takes the largest share at 27.9%, while biotech and healthcare equipment round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $7.6 billion and average daily volume of about 182,000 shares. It charges 10 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

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