Healthcare is traditionally one of the market’s most resilient sectors, offering both defensive stability and innovative growth potential.
But with the AI-driven tech trade once again firing on all cylinders, that sector has largely become an afterthought (which is not to say there isn’t strength in some sub-sectors, but we’ll get to that in a minute).
The healthcare sector of the S&P 500 is the worst-performing sector over the last six months, down 6.1%, compared to a gain of 10.5% for the S&P 500 as a whole.
That said, there are strong healthcare plays that are outperforming even against that backdrop, and the underperforming elements of the sector tend to hold up well when the market heads south.
So, given today’s high-flying environment, let’s take a look at two compelling healthcare ETFs: the Health Care Select Sector SPDR Fund (XLV) and the SPDR S&P Biotech ETF (XBI).
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Although both sit under the healthcare umbrella, they serve very different purposes in a portfolio. One offers protection when markets turn turbulent, while the other offers a lot of upside when the market’s appetite for risk is strong.
XLV: The Defensive Healthcare ETF
When markets grow volatile, investors tend to flock toward companies with stable earnings, recurring demand, and strong balance sheets. XLV—which tracks large-cap healthcare giants like pharmaceuticals, managed-care providers, and medical device manufacturers—is a natural fit.
Why XLV Can Outperform in a Bear Market
1. Relative strength in downturns. When times get tough, investors look for stability, which tends to put healthcare names at the top of their shopping lists. If you look back at 2022’s bear market, you’ll find that XLV delivered as advertised, skating through 2022 with a decline of only 3.6%.
2. Non-cyclical demand. Healthcare services, medications, and medical procedures are essential regardless of economic conditions. This keeps revenue streams more predictable even in recessions. It’s a point Cabot’s resident dividend expert, Tom Hutchinson, likes to hammer home when he writes about mega-trends like the aging of the population.
3. Lower volatility and steady dividends. XLV’s holdings—companies like Johnson & Johnson, UnitedHealth Group, Eli Lilly, and Merck—offer durable cash flows and dividends, making it comparatively safer than more speculative healthcare plays. If markets break down into bear territory, XLV is positioned to outperform as a defensive anchor in a portfolio.
XBI: The High-Growth ETF for a Bull Market
On the other end of the spectrum is XBI, one of the most widely followed biotech ETFs. It tracks a broader basket of biotech stocks, including small and mid-cap companies.
XBI tends to be more volatile (but also offers more upside) than traditional healthcare ETFs.
Why XBI Can Outperform in a Bull Market
1. Biotech moves strongly when markets turn risk-on. Historically, XBI has significantly outpaced the broader market during bull cycles. When investors feel confident, they gravitate toward high-growth, high-innovation sectors, like biotech. You can see that playing out right now, as XBI has risen by 10.1% in the last six months despite negative returns for the sector.
2. AI is accelerating drug discovery and healthcare innovation. A new wave of AI-driven healthcare developments is reshaping the biotech landscape:
- AI-powered drug discovery platforms are shortening development timelines.
- Machine learning is improving clinical trial predictive accuracy.
- Personalized medicine is becoming more viable due to algorithmic modeling.
Many of the companies leading these breakthroughs are smaller innovators—exactly the type of firms XBI emphasizes.
3. M&A tailwinds. Large pharmaceutical companies, flush with cash and facing patent cliffs, often acquire smaller biotech firms. Bull markets encourage more aggressive dealmaking, which typically boosts XBI’s performance.
If the market continues to rally and risk appetite remains in place, XBI offers high-growth exposure to the next wave of AI-driven healthcare innovation.
Given the momentum in the market right now, XBI looks like a better bet in the short term, but the sky-high valuations could have investors rushing into XLV if the market were to start heading south.
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*This post has been updated from a previously published version.
