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Healthcare ETFs in Focus on JNJ Earnings Beat

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Despite the biotech meltdown early in the year, 2014 is gradually turning out as another banner year for the healthcare space thanks to encouraging industry trends. In fact, healthcare is the top performing sector from a year-to-date look, returning nearly double digits versus the gain of 3.22% for the S&P 500 index.

An aging population, development of new drugs and innovative products, expansion into emerging markets, ever-increasing health care spending, and Affordable Care Act are fueling growth in the space (read: 3 Non-Leveraged ETFs Beating SPY).

The trend is likely to continue as Q3 earnings has kicked in and the first major company reporting earnings in the healthcare world – Johnson & Johnson’s (JNJ - Free Report) – continued its long streak of earnings beat. JNJ also raised its full-year earnings outlook for the third time in a row on growing sales of the new hepatitis C drug.

Johnson and Johnson Results in Detail

Earnings per share came in at $1.50, easily crushing the Zacks Consensus Estimate of $1.42 and improving from the year-ago earnings of $1.36. Revenues climbed 5.1% to $18.5 billion, beating the Zacks Consensus Estimate of $18.4 billion. The robust performance was driven by sales of new drugs, especially the hot hepatitis C medicine Olysio.

Based on the earnings beat, the company raised its earnings guidance from $5.85–$5.92 to $5.92–$5.97. The mid-point is above the Zacks Consensus Estimate of $5.92 and 2013 reported earnings of $5.52, reflecting bullishness on this company.

Though Johnson & Johnson’s new hepatitis C pill is enjoying great success since its introduction last year, the trend is unlikely to continue as Gilead (GILD - Free Report) and AbbVie (ABBV - Free Report) are set to roll out their new competitive hepatitis C drugs by the end of the year. The new drugs offered by JNJ’s rivals might erode its strong competitive position in hepatitis C treatment.

Market Impact

The concern over sustainable sales growth from the major drug pushed down JNJ shares nearly 2.13% at the close of the day on elevated volume of about 3 times the normal average daily trade. The mixed views put several healthcare ETFs having double-digit allocation to this world’s largest maker of healthcare products in focus for the coming days (see: all the Healthcare ETFs here).

Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the JNJ price or avoid these if the stock drags them down. The trio of funds currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

ETFs in Focus

Health Care Select Sector SPDR Fund (XLV - Free Report)

The most popular healthcare ETF, XLV follows the S&P Health Care Select Sector Index. This fund manages about $11.2 billion in its asset base and trades in heavy volume of around 7 million shares. Expense ratio came in at 0.16% annually. In total, the fund holds 55 securities in its basket with JNJ taking the top spot at 11.73% of the assets (read: Healthcare ETFs for your Portfolio's Wellness).

Pharma accounts for 44.3% share from a sector look while biotech, healthcare providers and services, and equipment and suppliers make up for double-digit exposure. The fund gained about 12% in the year-to-date time frame.

iShares U.S. Healthcare ETF ((IYH - Free Report) )

This fund provides exposure to 113 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s return at 11.14% of total assets. In terms of industrial exposure, pharma takes the top spot at 46%, followed by biotech (22%), medical equipment (16%) and healthcare services (14%).

The product has amassed nearly $2.6 billion in its asset base while charges 43 bps in annual fees. It trades in good volume of about 292,000 shares a day, suggesting a relatively tight bid/ask spread. IYH is up about 11.6% year to date.

Market Vectors Pharmaceutical ETF ((PPH - Free Report) )

This ETF provides a pure play to the pharmaceutical corner of the broad healthcare world by tracking the Market Vectors US Listed Pharmaceutical 25 Index. The fund holds 27 stocks in its basket with Johnson and Johnson occupying the top position at 10.80% (read: Pharma ETF Investing 101).

The product has $375.6 million in AUM and charges 35 bps in fees and expense. Volume is moderate as it exchanges about 97,000 shares a day. The fund has added over 14.3% so far this year.

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