Healthcare Is Due for a Rebound. These ETFs Are a Good Way to Buy In. -- Barrons.com

By Debbie Carlson

Healthcare is underperforming the broader market early in the second quarter, following late 2025's short-lived pop. But some strategists see the sector as a bargain, with subsectors such as pharmaceuticals and biotechnology particularly attractive.

At a time when the broader market is expensive and subject to headline risk, healthcare offers buyers a high-quality defensive option, one that could regain interest from investors seeking to reduce geopolitical risk.

Like a sick patient, the healthcare sector has been waylaid over the past few years by regulatory policy overhang stemming from Medicaid cuts, tariff impacts, drug pricing, and Covid-era ramifications, all of which soured investor sentiment, says Brian Storey, a senior portfolio manager at Brinker Capital Investments. Many of these are resolved or are being resolved, improving the outlook, he adds.

Greg Swenson, director of equities at the Leuthold Group, says healthcare is one of the firm's biggest overweights and top sectors, particularly for biotech and pharmaceuticals, which stands out for strong fundamentals and valuations. He isn't worried about the recent stumbles in the sector after last year's gains, calling the weakness "a bump in the road."

Storey offers a second positive argument for pharma and biotech, noting they could benefit from deregulation and an improved environment for initial public offerings and mergers and acquisitions. It all could lead to another way to play the artificial-intelligence theme.

"It's somewhat nascent still, but a lot of the artificial-intelligence tools are likely to be very impactful for drug discovery," he says, adding that AI could also help speed up biotech companies' early research efforts.

Investors with no healthcare exposure could start with a core holding such as the $37.8 billion State Street Health Care Select Sector SPDR ETF, which mimics that sector, or the $18.6 billion Vanguard Health Care ETF. The State Street ETF is a market-cap weighted ETF, and its current weakness -- it's down 5.8% year to date -- is due to having both Intuitive Surgical and Abbott Laboratories, which are down 20% and 30%, respectively, in its top 10 holdings.

The Vanguard fund takes an all-cap approach, with 407 names, compared with 59 in the State Street fund. Swenson says Vanguard's approach and slightly higher biotech weighting gives it exposure to smaller biotech names that might benefit from merger trends.

Steven Conners, president of Conners Wealth Management in Scottsdale, Ariz., calls the State Street fund "a nice hedge should the economy deteriorate from the higher GDP levels we have seen recently."

Swenson and Conners both like the $7.93 billion iShares Biotechnology ETF, a market-weighted biotech fund that skews to large-cap names. Another biotech option is the $8.26 billion State Street SPDR S&P Biotech ETF, which equal-weights its constituents, giving it a smaller-cap exposure. Conners emphasizes both of these are riskier ETFs, so investors need to measure them against their risk tolerance.

In the pharma space, Swenson uses the $949 million VanEck Pharmaceutical ETF thanks to its global focus, preferring it over the $946 million iShares U.S. Pharmaceuticals ETF.

Not every subsector will benefit. Storey says the medical-device industry's growth is still likely to be hampered by tariffs. That's weighing on funds like $3.2 billion iShares U.S. Medical Devices ETF.

In recent years, healthcare lost some of its defensive, high-quality allure when megacap tech stocks became so profitable, defensive, and stable. That's changing as many tech companies' AI buildout becomes more capital-intensive, eating up much of their free cash flow. Given that, Swenson says, the healthcare space may regain attention from quality-driven investors.

Investors nervous about geopolitical risk might also take shelter in healthcare. Aside from some European pharma names affected by the U.S.'s conflict with Iran, "there are not many sectors that are as antiwar as healthcare," he says.

Write to editors@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 06, 2026 01:30 ET (05:30 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.