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J&J Brightens Outlook: Healthcare ETFs in Focus

The Q2 earnings season has commenced and Johnson & Johnson JNJ was the first drug company to report earnings on July 18 before the opening bell. The world's biggest maker of health care products continued its long streak of earnings beat and offered an upbeat outlook for the full year. However, it lagged our revenue estimate again on sluggish drug sales.

Q2 Results in Detail

Earnings per share came in at $1.83, 4 cents ahead of the Zacks Consensus Estimate and 5.2% higher than the year-ago quarter. Revenues grew 1.9% year over year to $18.84 billion but fell shy of the Zacks Consensus Estimate of $18.89 billion. Weak drug sales of arthritis treatment Remicade, diabetes medicine Invokana and cancer drug Zytiga – which are among the company’s 10 top-selling treatments – were responsible for the revenue miss.

Johnson & Johnson raised its full-year earnings per share guidance to $7.12–$7.22 from $7.00–$7.15 and revenue guidance to $75.8–$76.1 billion from $75.4–$76.1 billion. It expects sales and profitability to pick up in the second half of this year on strong demand for newer, pricey treatments such as cancer drugs Darzalex and Imbruvica. The Zacks Consensus Estimate are currently pegged at $7.10 for earnings per share and $75.71 billion for revenues (see: all the Healthcare ETFs here).

Market Impact

Following the results, shares of JNJ rose 1.7% at the close on July 18. Currently, the stock has a Zacks Rank #2 (Buy) with a VGM Score of B. Further, Johnson & Johnson belongs to a solid industry with a Zacks Rank in the top 24%.

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

Health Care Select Sector SPDR Fund XLV

The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $17.7 billion in its asset base and trades in heavy volume of around 7.8 million shares. Expense ratio comes in at 0.14% annually. In total, the fund holds 63 securities in its basket with JNJ taking the top spot at 11.7% of the assets. Pharma accounts for 34.5% share from a sector look while biotech, healthcare providers and services, and healthcare equipment and supplies make up for a double-digit exposure each. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: Top Ranked Healthcare ETFs for Long Term Investors).

iShares U.S. Healthcare ETF IYH

This fund offers exposure to 118 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s return at 11.2% of total assets. In terms of industrial exposure, pharma takes the top spot at 33.9%, followed by biotech (22.8%), and healthcare equipment (19.2%). 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 99,000 shares a day and has a Zacks ETF Rank of 1 with a Medium risk outlook.

Vanguard Health Care ETF VHT

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 364 stocks in its basket. Out of these, Johnson & Johnson takes the top spot with 10.2% allocation. Pharma takes the largest share at 31.3% while biotech and healthcare equipment round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $6.8 billion and average daily volume of about 199,000 shares. It charges 10 bps in annual fees and has a Zacks ETF Rank of 1 with a Medium risk outlook.

Fidelity MSCI Health Care Index ETF FHLC

This fund provides exposure to 346 healthcare stocks with AUM of $813 million. This is done by tracking the MSCI USA IMI Health Care Index. Here too, JNJ is the top firm with nearly 10.2% allocation. Pharma accounts for 30.9% share while biotech, healthcare equipment and supplies, and healthcare providers and services round off the top three spots with a double-digit exposure each. The ETF has 0.08% in expense ratio while volume is good at 141,000 shares a day. FHLC has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

iShares U.S. Pharmaceuticals ETF IHE

This ETF provides exposure to 41 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Of these, Johnson and Johnson is the top firm accounting for 9.9% share. The product has $703.1 million in AUM and charges 44 bps in fees and expenses. Volume is lower as it exchanges about 20,000 shares a day. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook (read: What Lies Ahead for Pharma ETFs in Second Half 2017).

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Johnson & Johnson (JNJ): Free Stock Analysis Report
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
VIPERS-HLTH CR (VHT): ETF Research Reports
 
ISHARS-US HLTHC (IYH): ETF Research Reports
 
FID-H CARE (FHLC): ETF Research Reports
 
ISHARS-US PHARM (IHE): ETF Research Reports
 
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