Healthcare was the best performing sector in the second quarter with a 6.3% return, and not far behind tech sector looking at the year-to-date performance. The sector has been outperforming the broader market despite the uncertainty surrounding Trump administration’s plans to repeal and replace Obamacare.
Healthcare stocks have rallied mainly in anticipation of a favorable policy environment. The Trump administration plans to focus on easing regulatory hurdles rather than lowering drug prices, according to a draft executive order obtained by the New York Times. Investors also expect a streamlined and faster drug approval process.
Further, some investors rotated out of pricier tech stocks into healthcare stocks. These stocks were beaten down over the past two years. After trailing the broader market over the past so many months, healthcare sector valuations looked quite attractive.
The longer-term outlook for healthcare remains positive as the sector is a direct beneficiary of the world’s rapidly aging demographic trend. Further, in many developing countries, governments are increasing their healthcare support. And in these countries, healthcare spending is rising from a very low level and has a significant potential to go up as income levels in these countries rise.
Healthcare is a defensive sector and could be a good bet for those worried about rising geopolitical uncertainty. Further, historically healthcare has outperformed the broader market during a period of rising interest rates.
Within the broader healthcare sector, biotech stocks are the best performers of late. But given the volatility associated with biotech stocks, they are more suitable for investors with high-risk tolerance. For long-term investors, ultra-cheap broad healthcare ETFs that are currently ranked Zacks Rank #1 (Strong Buy) are more suitable.
To learn more about the SPDR Health Care Select Sector (MX:XLV) ETF (XLV) and the Vanguard Health Care ETF (VHT), please watch the short video above.
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