Healthcare ETFs Leading the Pack This Q2 Earnings - ETF News And Commentary

The Q2 earnings season has been impressive with both earnings and revenue growth rates exceeding expectations and outpacing the numbers in the past few quarters. Total earnings for the S&P 500 companies that have reported results so far are up 9% with a beat ratio of 65.6%, while revenues are up 4.6% with a revenue beat ratio of 60.6%.

Companies across a wide number of sectors have posted strong results beating analyst estimates. The estimate revision trend for Q3 is also not as bad as was seen in the previous quarters. In fact, the magnitude of Q3 negative revisions is the lowest in more than a year, suggesting modest improvement on the guidance front (read:

).

While there have been winners in many corners generating double-digit growth, the medical sector is clearly leading the way. This is especially true as the sector has been the major contributor to both earnings (+15.8%) and revenue (+12.4%) growth so far, crushing estimates and providing a solid outlook.

Earnings growth has more than doubled that of Q1 thanks to encouraging industry trends. Increased merger and acquisition activities, development of new drugs, expansion into emerging markets, ever-increasing health care spending, an aging population and the Affordable Care Act (often known as Obamacare) are fueling growth in the space.

In particular, earnings at Gilead Sciences

, Amgen

, Pfizer

and Merck

have been inspiring, thereby becoming yardsticks for other stocks in the space. The stock prices have also been surging since their earnings release (read:

).

Further, the healthcare sector actually has the best Rank for any industry at the time of writing – about 70% of the industries under healthcare have Zacks Ranks in the top 42%, spreading optimism in the sector.

Resultantly, a number of healthcare ETFs have provided handsome returns buoyed by solid earnings growth. However, the gains have been badly eroded by renewed geopolitical tensions and a stumbling stock market last week.

However, we have highlighted three funds that are still outpacing the broad sector

and the broad market

funds by wide margins. These products currently have a Zacks ETF Rank of 3 or ‘Hold' rating.

This fund uses equal weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 55 stocks in its basket with AUM of $86.8 million, each security accounts for less than 2.5% of total assets. The ETF is skewed toward small caps at 56% while large and mid caps account for 23% and 21% share, respectively (read:

).

From a sector look, healthcare services and healthcare facilities take the top two spots with 35.1% and 29.3% share, respectively. The fund charges 35 bps in fees per year from investors and trades in a paltry volume of around 5,000 shares a day. The ETF added 0.20% in the trailing one-month period.

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 48 securities in its basket with the largest allocation going to United Health

and Express Scripts

at 12.8% and 9.8%, respectively. Other firms do not hold more than 6.7% of IHF.

The product has a certain tilt toward large caps, as these account for 54% share while the rest is roughly spilt between mid and small caps. The fund has been able to manage $542.7 million in its asset base while volume is light under 6,000 shares per day on average. It charges 43 bps in annual fees and expenses. The ETF lost 0.17% over the past month (see:

).

This fund also provides equal weight exposure of around 2% to 53 stocks and tracks the S&P 500 Equal Weight Index Health Care. In terms of industries, healthcare equipment and supplies takes the top spot at roughly 28.5% of the total, closely followed by healthcare providers and services (26.4%) and pharmaceuticals (21.9%).

While large caps account for a substantial 77% of the assets, mid caps take the remainder but for the 2% going to small caps. The product has accumulated $303.8 million in its asset base while it trades in light volume of around 29,000 shares. The expense ratio came in at 0.40%. The fund is down 1.8% over the trailing one-month period.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.