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J&J Posts Mixed Q3 Bag: ETFs in Focus

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With the Q3 earnings season kicking off, Johnson & Johnson (JNJ - Free Report) is the first to have reported earnings in the health care space. The world's biggest maker of health care products continued its long streak of earnings beat but revenues came in below our estimates due to currency headwinds. The company lifted its full-year outlook, reflecting confidence in its future growth.

Johnson and Johnson Q3 Results in Focus

Earnings per share came in at $1.49, a nickel above the Zacks Consensus Estimate but 7.4% below the year-ago earnings. Revenues slid 7.4% year over year to $17.1 billion and fell shy of the Zacks Consensus Estimate of $17.4 billion (read: Winning ETF Strategies for Q4).

Healthy sales of new drugs including Zytiga, Invokana, Imbruvica, and Xarelto and strength of established drugs such as Stelara, Concerta, Simponi, Invega Sustenna and Prezcobix offset a steep decline in sales of the hepatitis C medicine – Olysio – which has lost its competitive position in the U.S. to its rivals Gilead (GILD - Free Report) and AbbVie (ABBV - Free Report) . Notably, Imbruvica is expected to be the blockbuster cancer drug, fetching in about one billion dollars in revenues as early as next year.

In spite of the fact that a strong U.S. dollar would remain a major drag on international revenue growth, the company raised the lower end of the earnings per share guidance range to $6.15–$6.20 from $6.10–$6.20. The new midpoint is above the current Zacks Consensus Estimate of $6.16. The diversified drug maker would also repurchase about $10 billion shares, though the period of time is unknown (see: all the Healthcare ETFs here).

Market Impact

Based on mixed results, shares of JNJ dropped 0.6% on the day and the following healthcare ETFs with the largest allocation to this behemoth are in focus. Investors should carefully monitor the movement of these funds and grab the opportunity when it arises. This is especially true as these funds have a Zacks ETF Rank of 1 or ‘Strong Buy’ with a Medium risk outlook, suggesting their outperformance in the months ahead.

iShares U.S. Pharmaceuticals ETF ((IHE - Free Report) )

This ETF targets the pharma corner of the broad health care space and tracks the Dow Jones U.S. Select Pharmaceuticals Index. Holding 43 stocks in its basket, Johnson & Johnson occupies the top position at 10.6%. Pharma takes the largest share at 87.9% while biotech takes the remainder. The product has managed nearly $849 million in its asset base while volume is relatively light at about 62,000 shares a day on average. The fund charges 43 bps in fees per year from investors and has lost 2.3% following the JNJ earnings release.

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

The most popular health care ETF, XLV follows the Health Care Select Sector Index. This fund manages over $13.1 billion in its asset base and trades in heavy volume of more than 11.6 million shares. Expense ratio came in at 0.14% annually. In total, the fund holds 57 securities in its basket with JNJ taking the top spot at 10.3% of the assets. Pharma accounts for 38.4% share from a sector look while biotech, health care providers and services, and equipment and supplies make up for a double-digit exposure each. The fund shed about 1.2% on the day (read: 5 Sector Favorites for Q3 Earnings & Their Hot ETFs).

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

This fund provides exposure to 124 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s return at 9.6% of total assets. In terms of industrial exposure, pharma takes the top spot at 36.2%, followed by biotech (27.2%), and health care equipment (14.8%). The product has amassed nearly $1.8 billion in its asset base while charges 43 bps in annual fees. It trades in solid volume of around 330,000 shares a day and fell 1.4% post JNJ results.

Vanguard Health Care ETF ((VHT - Free Report) )

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 342 stocks in its basket. Out of these, Johnson & Johnson takes the top spot with at 8.2% allocation. Pharma takes the largest share at 37% while biotech and health care equipment round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $5.4 billion and average daily volume of about 348,000 shares. It charges 12 bps in annual fees and expenses. The product lost 1.3% in yesterday’s trading session.

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