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Lackluster J&J Q1 Pushes Healthcare ETFs Down

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The Q1 earnings season has kicked in and Johnson & Johnson (JNJ - Free Report) was the first drug company to report earnings on April 18 before the opening bell. The world's biggest maker of health care products continued its long streak of earnings beat but lagged our revenue estimate again on sluggish drug sales.

Q1 Results in Detail

Earnings per share came in at $1.83, six cents ahead of the Zacks Consensus Estimate and 5.8% higher than the year-ago quarter. Revenues grew 1.6% year over year to $17.77 billion but fell shy of the Zacks Consensus Estimate of $18 billion (read: Top ETF Stories of Q1 from Wall Street).

Weak drug sales of blood thinner Xarelto, diabetes medicine Invokana and cancer drug Zytiga – which are among the company’s 10 top-selling treatments – were responsible for revenue miss. Additionally, J&J’s blockbuster arthritis treatment Remicade lost its momentum due to stiff competition from the biosimilar version of the drug in the U.S. late last November by Pfizer (PFE - Free Report) .

Johnson & Johnson is on track to close its biggest-ever $30 billion acquisition of Swiss drugmaker Actelion in the ongoing quarter. As such, it raised its earnings per share guidance to $7.00–$7.15 from $6.93–$7.08 and revenue guidance to $75.4–$76.1 billion from $74.1–$74.8 billion to include the impact of the Actelion deal. The Zacks Consensus Estimate is currently pegged at $7.03 for earnings per share and $75.02 billion for revenues.

Further, the company expects Actelion to contribute 35–40 cents to earnings per share in 2018 (see: all the Healthcare ETFs here).

Market Impact

Following the results, shares of JNJ fell as much as 3.8%, representing the biggest one-day drop in more than eight years. Currently, the stock has a Zacks Rank #3 (Hold) with a VGM Score of C. However, Johnson & Johnson belongs to a solid industry with a Zacks Rank in the top 39%.

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 the five funds that have a Zacks ETF Rank of 3.

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

The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $15.9 billion in its asset base and trades in heavy volume of around 9.8 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 12.1% of the assets. Pharma accounts for 36.3% share from a sector look while biotech, healthcare providers and services, and healthcare equipment and supplies make up for a double-digit exposure each. The ETF shed 1.1% following lackluster JNJ result (read: 4 Sector ETFs Defying 10-Month Low Job Gains in March).

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

This fund provides exposure to 118 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s return at 11.6% of total assets. In terms of industrial exposure, pharma takes the top spot at 35.7%, followed by biotech (22.4%), and healthcare equipment (18.6%). 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 135,000 shares a day and lost 0.8% on the day.

Vanguard Health Care ETF (VHT - Free Report)

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 358 stocks in its basket. Out of these, Johnson & Johnson takes the top spot with 10.2% allocation. Pharma takes the largest share at 32.9% while biotech and healthcare equipment round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $6.1 billion and average daily volume of about 273,000 shares. It charges 10 bps in annual fees and expenses and shed 1% post JNJ result.

Fidelity MSCI Health Care Index ETF (FHLC - Free Report)

This fund provides exposure to 344 healthcare stocks with AUM of $691.6 million. This is done by tracking the MSCI USA IMI Health Care Index. Here too, JNJ is the top firm with nearly 10.3% allocation. Pharma accounts for 32.7% 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 184,000 shares a day. FHLC was down 0.9% on the day.

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

This ETF provides exposure to 40 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Out of these, Johnson and Johnson is the top firm accounting for 10.1% share. The product has $708.3 million in AUM and charges 44 bps in fees and expense. Volume is lower as it exchanges about 47,000 shares a day. The fund has shed 1.3% following JNJ earnings (read: Should You Buy Pharma ETFs Now?).

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