With the first quarter earnings season gathering steam, the
results of major companies have dictated recent market trends.
Weak earnings from some of the banking giants pushed the
financial sector ETF (
) down, while tech
) also slumped on the back of weak earnings by Apple and some of
the other big tech firms.
According to S&P Capital IQ, with results from about 271
companies in the S&P 500 index already in, first-quarter
earnings for companies in the S&P 500 are now on track for a
gain of 3.6% versus a year ago.
This week, investors should turn their focus to the healthcare
Health Care Select Sector SPDR Fund (
as two of the industry's bellwethers are scheduled to report
their first quarter earnings. Pfizer and Merck are the two
companies in line to report, and both companies play a huge role
in the fund's returns (
3 Sector ETFs Surviving This Slump
Pfizer holds the second position in XLV and has a dominant
role in the performance of the ETF with a share of 11.98% in the
fund. On the other hand, Merck gets the third position in the ETF
with a share of 7.88%. In other words, the two combine to
make up nearly one-fifth of the total returns in the ETF,
suggesting that their reports will be big drivers of the fund
The ETF has performed relatively well delivering a return of
19.2% year to date, so expectations could be high for Pfizer and
Merck. However, both are just have Zacks Ranks of 3 or 'Hold' so
their reports could be mixed based on our models.
Still, for investors looking to trade the sector, it is worth
noting that XLV is quite favorable to traders, as it has a huge
volume and AUM approaching $8 billion. Though, the fund is
heavily concentrated in its top holdings, as the ten biggest
firms make up just under 60% of total assets (
5 Sector ETFs Surging to Start 2013
Other Key Aspects of XLV
Beyond the two aforementioned giants, investors should note
that Johnson & Johnson gets the first position in the fund.
In fact, the top three holdings get one third of the asset
allocation, thereby playing a dominant role in the performance of
The ETF represents a varied group of stocks that belong to
pharmaceutical (48.29%), healthcare equipment and supplies
(16.28%), healthcare providers & services (15.47%) and
biotechnology (15.46%). The fund charges a fee of 18 basis
Healthcare Sector in Focus
The U.S. healthcare sector is one of the potential bright
spots as the country is one of the major markets for healthcare
and one of the largest spenders on public health, putting the
sector in an advantageous position.
The sector has been in focus despite profitability remaining
under pressure for many companies, and some policy uncertainty
with regards to the Affordable Care Act.
The healthcare sector is expected to remain in growth
territory, in 2013, given the aging population and higher rates
of chronic diseases, growing demand in emerging markets and new
product launches (
4 Best ETF Strategies for 2013
The increase in market size combined with inorganic growth for
many companies in the form of mergers and acquisitions would help
counter the recent decline in revenues seen across the board in
the pharma sector. It would also address the issue of the patent
cliff that has lately affected the big companies.
In fact, the pharmaceutical industry is showing signs of
recovery from one of the biggest patent cliffs in recent times.
The last few quarters saw major blockbusters like Merck's
Singulair and Pfizer's Lipitor losing patent protection. These
products alone represented branded sales worth more than $15
However, the effect of these going generic was felt mostly in
2012. While the industry won't be completely free from more key
products going generic, the major patent expiries are over and
done with. New products should start contributing significantly
to results and increased pipeline visibility and appropriate
utilization of cash should increase confidence in the sector.
The pharma sector has also witnessed major merger and
acquisition (M&A) activity over the last couple of years.
Going forward, these small bolt-on acquisitions are expected to
continue. A significant pickup in in-licensing activities and
collaborations for the development of pipeline candidates is also
expected going forward (
Zacks Top Ranked Healthcare ETF: FXH
The near future of health care is uncertain, as Obamacare
fully gets underway. Many pharma companies are also having
trouble filling their product pipelines as new drugs go off
However, the sector is still an interesting play due to its
defensive nature and its resiliency as of late. And with two key
earnings reports due out this week, it could be a very important
few days for this key ETF.
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MERCK & CO INC (MRK): Free Stock Analysis
PFIZER INC (PFE): Free Stock Analysis Report
SPDR-FINL SELS (XLF): ETF Research Reports
SPDR-TECH SELS (XLK): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
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