Tuesday’s ETF To Watch: iShares Dow Jones U.S. Health Care Index Fund (IYH)

by on January 25, 2011 | ETFs Mentioned:

Despite ongoing concerns over debt issues in developed markets and inflation fears in emerging nations, a number of equity sectors have managed to post solid returns thanks to increased optimism over the strength in the market’s recovery. While some of the nation’s most famous companies have come roaring back, others have failed to capitalize off of this boost in mood and have stagnated in recent weeks. One key sector that has experienced this is the health care industry which is facing an increasingly uncertain future due to a number of key events.

Many analysts are growing increasingly concerned over the ability of major drug companies to expand their product lineup and continue growing revenues. Without decent returns from their current drug pipelines, a number of pharma companies will likely have to take a huge hit in earnings or go on an acquisition spree in order to maintain sales levels. Political issues are also creeping into the mix as the recent Republican victory in the House and questions over the party’s plans for health care reform continue to hang over the pharmaceutical industry, suggesting that the in focus sector could remain in the spotlight for much of the year. Due to these headwinds, many investors continue to look at the one company that dominates the field and moves markets in the health care sector for guidance; Johnson & Johnson (JNJ).

In addition to these macro economic issues, the consumer products giant has had a rough series of years thanks to numerous recalls and slipping sales which have led many to question the company’s continued leadership in the sector. In fact, some of the firm’s most famous products– including Tylenol– have seen extensive recalls as of late causing many to question the firm’s commitment to quality control. These recalls look to not only have a huge impact on the company’s brand name but on their bottom line as well; JNJ has  said that the recalls will cut 2010 sales by about $600 million, potentially creating a significant drag on the company’s profits for the final quarter of the year, figures that the company will report before the market opens for Tuesday trading [see all the ETFs in the Health & Biotech Equities ETFdb Category].

The company is expected to post earnings of $1.03 per share on sales of just over $16 billion. This compares somewhat favorably to the year ago period in which the company reported earnings of 79 cents– including 23 cents in charges– on a slightly higher revenue of $16.55 billion. However, the real test for the company will be if it can finally offset growing fears over the company’s quality control program and if any new prescription drugs are likely to be approved; a situation which could greatly help to boost revenues and smooth over any other issues at the consumer product firm [see Three ETFs To Invest Like David Tepper].

Due to this crucial earnings report, we look for the iShares Dow Jones U.S. Health Care Index Fund (IYH) to remain in focus throughout today’s trading session. The fund, which tracks the Dow Jones U.S. Health Care Index, allocates its top individual weighting towards the in focus JNJ at just over 12% of IYH’s total assets. In addition to this heavy weighting, fellow pharma giants Pfizer (9.9%), Merck (7.8%), and Abbott Labs (5.2%) also comprise large portions of this popular product as well [see more on IYH's holdings page].

Over the past 52 weeks IYH has been remarkably stable posting a gain of just 3.1% with a beta of 0.68. However, the fund has begun to pick up steam lately, posting a robust 13.9% surge over the past 26 weeks although these gains have levels off here in 2011. If IYH plans on returning to its impressive growth levels of the fall, investors will have to see a quality earnings report out of key component JNJ later today. Yet on the flip side, if Johnson and Johnson disappoints investors look for IYH and the health care sector at large to tumble on the day, especially if other big pharma firms disappoint as well.

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Disclosure: No positions at time of writing.