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Health care is one of the strongest and most stable sectors in the market — at least, it has been traditionally. The reason why is because companies in the sector see consistent demand for their services. No matter what’s going on in the broader economy, people’s health and physical well-being will always need to be tended to. Because of this, health-care stocks are generally seen as “recession proof.”
Size-wise, health care is also huge — it made up 17.6% of gross domestic product (GDP) in the United States in 2023, with further growth forecasted for the next decade. The Centers for Medicaid and Medicare Services have projected a 5.6% average annual increase in national health spending by 2032.
Yet over the past year, stocks in the health care space have lagged. And while this market sector is an absolute behemoth, it is by no means immune to feeling ill. Yet sometimes, strong sectors experiencing a pullback can be good value plays. And with that in mind, there’s no better way to measure a sector than through its benchmark exchange-traded fund (ETF), the Health Care Select Sector SPDR Fund (XLV).
XLV is the largest passive fund in health care and is focused on U.S. stocks. It is also one of the oldest, launched in 1998 by State Street. The fund invests in the 64 largest health care stocks, allocated across the sector, to provide investment results that correspond to the performance of publicly traded equity securities of companies in the Health Care Select Sector Index.
XLV captures a broad swath of the market through its 64 holdings, which are weighted by market value. The fund has net assets of around $32.25 billion with a low expense ratio of 0.09%. However, XLV is currently down 3.6% in the last month, 2.8% over the last three months and 5% year to date.
Top holdings include Eli Lilly and Company (LLY), 12.54%; Johnson & Johnson (JNJ), 8.55%; AbbVie Inc. (ABBV), 7.30%; UnitedHealth Group Incorporated (UNH), 4.74%; Abbott Laboratories (ABT), 4.73%; Merck & Co. Inc. (MRK), 4.22%; Thermo Fisher Scientific Inc. (TMO), 3.66%; Intuitive Surgical Inc. (ISRG), 3.56%; Amgen Inc. (AMGN), 3.36% and Boston Scientific Corporation (BSX), 3.23%.
Still, health care is traditionally a relatively stable sector and is often thought of as a good choice for uncertain times. A projected 20% of the American population will be aged 65 and up by 2030, which will only drive-up demand for pharmaceuticals and health care services, making health care a rapidly growing industry.
Be aware, however, that the health care sector has unique risk factors that require consideration. Investors should always do their due diligence before adding any stock or fund to their portfolio holdings.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
