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ETF News And Commentary

The Q3 earnings season has kicked in and Johnson & Johnson (JNJ - Analyst Report) is the first drug company to have reported earnings on October 18 before the opening bell. The world's biggest maker of health care products continued its long streak of earnings beat and topped our revenue estimate on strong prescription drug sales. The company also raised its full-year earnings outlook, reflecting confidence in its future growth.

Q3 Results in Detail

Earnings per share came in at $1.68, three cents ahead of the Zacks Consensus Estimate and 12.8% higher than the year-ago quarter. Revenues grew 4.2% year over year to $17.82 billion and edged past the Zacks Consensus Estimate of $17.72 billion. Better-than-expected results came from healthy sales of new drugs like Darzalex, Imbruvica and Xarelto and the strength of established drugs such as Stelara, Remicade, Simponi and Invega Sustenna (read: ETFs to Watch If Hillary Clinton Wins the Presidency).

For fiscal 2016, Johnson & Johnson lifted its earnings per share guidance to $6.68–$6.73 from $6.63–$6.73 while kept its revenue forecast stable at $71.5–$72.2 billion. The Zacks Consensus Estimate is currently pegged at $6.69 for earnings per share and $72.1 billion for revenues. These are far above the mid-point of the company’s current projection.

Going forward, management is confident of filing 10 new pharmaceutical products between 2015 and 2019, each with a revenue potential over $1 billion given a number of regulatory approvals, several new drug application submissions, and new breakthrough therapy designations from the FDA.

Market Impact

Following the results, shares of JNJ initially rose 0.9% in the pre-market session but pulled back thereafter by 1%. Currently, the stock has a Zacks Rank #3 (Hold) with a VGM Score of C. However, Johnson & Johnson belongs to a lackluster industry with a Zacks Rank in the bottom 22%, suggesting that rough trading might be in store.

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 listed four funds that have a top Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) with a Medium risk outlook (see: all the Healthcare ETFs here).

Health Care Select Sector SPDR Fund (XLV - ETF report)

The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $12 billion in its asset base and trades in heavy volume of around 9.2 million shares. Expense ratio comes in at 0.14% annually. In total, the fund holds 61 securities in its basket with JNJ taking the top spot at 12.2% of the assets. Pharma accounts for 37.9% share from a sector look while biotech, healthcare equipment and supplies, and healthcare providers and services make up for a double-digit exposure each. The fund has a Zacks ETF Rank of 1.

iShares U.S. Healthcare ETF (IYH - ETF report)

This fund provides exposure to 119 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s return at 11.5% of total assets. In terms of industrial exposure, pharma takes the top spot at 36.9%, followed by biotech (22.2%), and healthcare equipment (19.1%). The product has amassed nearly $1.8 billion in its asset base while charges 44 bps in annual fees. It trades in a solid volume of more than 113,000 shares a day and has a Zacks ETF Rank of 1 (read: ETFs to Play as Biotech Juggles Election & Earnings).

Vanguard Health Care ETF (VHT - ETF report)

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 348 stocks in its basket. Out of these, Johnson & Johnson takes the top spot with 10.1% allocation. Pharma takes the largest share at 33.3% while biotech and healthcare equipment round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $5.4 billion and average daily volume of about 177,000 shares. It charges 9 bps in annual fees and expenses and has a Zacks ETF Rank of 1.

Fidelity MSCI Health Care Index ETF (FHLC - ETF report)

This fund provides exposure to 348 healthcare stocks with AUM of $488.8 million. This is done by tracking the MSCI USA IMI Health Care Index. Here too, JNJ is the top firm with nearly 10.5% allocation. Pharma accounts for 33.7% 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 110,000 shares a day. FHLC has a Zacks ETF Rank of 2 (read: Fidelity Slashes Fees for 11 Sector ETFs).

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