Market Overview

Health Care ETFs Looking Healthy Ahead of Earnings

Although the market is awash in earnings reports from the financial services sector, profit updates from another one of 2013's top-performing sectors will start trickling in Tuesday.

That is when health care earnings really kicks off with Dow component Johnson & Johnson (NYSE: JNJ) stepping into the earnings confessional before the bell.

Simply put, health care ETFs have been exceptional performers this year with the Health Care Select Sector SPDR (NYSE: XLV) and the Vanguard Health Care ETF (NYSE: VHT) posting an average gain of 26.6 percent. Both ETFs are heavy on blue-chip pharmaceuticals names, but each offers exposure to other sub-sectors of the health care universe.

"One of those potential bright spots is the Biotechnology industry. According to S&P Capital IQ equity analyst Steven Silver, this industry has experienced a strong period reflecting the reporting of late-stage clinical trials with several drugs that have blockbuster potential, a more favorable regulatory environment with a more accommodating FDA, and a favorable M&A climate," said S&P Capital IQ in a research note.

Biotech giants Gilead (NASDAQ: GILD), Amgen (NASDAQ: AMGN) and Celgene (NASDAQ: CELG) are top-10 holdings in XLV whereas VHT features Gilead, Amgen and Biogen (NASDAQ: BIIB) among its top-10 lineup. VHT allocates 18.9 percent of its weight to biotech, 210 basis points more than XLV allocates to the sub-sector, perhaps accounting for the Vanguard offering's slight out-performance of XLV this year. S&P Capital IQ has a five-star rating on Gilead.

VHT is also the cheaper of the two ETFs with a 0.14 percent annual expense ratio compared to 0.18 percent for XLV. S&P Capital IQ rates both ETFs Overweight.

"In addition to Biotech, S&P Capital IQ equity analysts have positive fundamental outlooks on the Health Care Technology, Health Care Services, Health Care Distributors, Life Sciences Tools & Services and Managed health Care industries," said S&P Capital IQ.

While pharmaceuticals and biotech names combine for 63.3 percent of XLV's weight, the fund does allocate a combined 32 percent of its weight to health care providers and equipment makers. Equipment providers account for 16.4 percent of VHT's weight.

Despite political headwinds at the hands of stealth tax on medical device makers included as part of Obamacare, medical device and equipment makers have rewarded investors this year. The iShares U.S. Medical Devices ETF (NYSE: IHI), which was not mentioned in the S&P Capital IQ note, was up 16.6 percent year-to-date heading into the start of trading Monday.

Still, VHT and XLV represent credible avenues for exposure to blue-chip pharmaceuticals names. At the end of the first quarter, Dow components Johnson & Johnson, Pfizer (NYSE: PFE) and Merck (NYSE: MRK) combine for 27.1 percent of VHT's weight. As of Friday, that trio equaled nearly 31 percent of XLV's weight.

For more on ETFs, click here.

Posted-In: Analyst Color Earnings Long Ideas News Sector ETFs Short Ideas FDA Intraday Update Best of Benzinga

 

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