Healthcare is traditionally one of the market’s most resilient sectors, offering both defensive stability and innovative growth potential.
And given the recent tumult in the market, largely a product of the cooling of the AI trade, it shouldn’t come as a surprise that it’s also been one of the market’s best-performing sectors.
The healthcare sector of the S&P 500 is the second-best-performing sector over the last six months, up 14.0% and behind only technology.
And over shorter timeframes, the performance has been even stronger. Healthcare is the strongest sector over the last three-month (+11.4%), one-month (+5.9%) and one-week (+3.0%) periods.
As an added bonus, there are strong healthcare plays that should continue to outperform, regardless of whether the current selling pressures build to a bear market or they recede and the bull market gets into gear.
So, given today’s uncertain 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 if risk appetite returns.
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. Recent relative strength. As outlined above, XLV has been outperforming the growth-heavy market sectors during the latest bout of volatility. Healthcare mega-caps have held up well despite inflation concerns, higher rates, and slowing economic indicators. And, if you look back at 2022’s bear market, you’ll find that XLV delivered as advertised then as well, 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 continue to eschew risk or 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 rebounds 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.
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 rallies and risk appetite returns, XBI offers high-growth exposure to the next wave of AI-driven healthcare innovation.
Given the sky-high valuations and the notable shift in sentiment, I prefer XLV today. But if the bull market returns in full force, XBI is a diversified way to play both the AI and aging mega-trends.
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