Why Invest in the Healthcare Sector?

Over the past decade or two, economists and Wall Street have presented the case for investing in the healthcare sector. The compelling case hasn’t been a difficult one to make. The aging of America is the primary reason. As we age, our requirement for medical care rises.

Recently, with the passage of the Affordable Care Act (Obamacare), literally millions of Americans now have access to healthcare that previously did not.

Another reason that isn’t often given, is the socially redeeming benefits of investing healthcare dollars in companies that heal and save lives as opposed to investing in “sin stocks” as the street refers to them (alcohol, weapons manufacturers etc.)

One of the most compelling reasons is the returns that healthcare investors have reaped. Over the past 5 years, the Healthcare sector (as measured by the S&P 500 Healthcare sector ETF) has beaten all other sectors (see chart below). Moreover, since the inception of Sector ETFs back in 1998, healthcare has been the number two ranked sector over the 17-year history of the instruments (Healthcare was narrowly edged out by the consumer discretionary sector by only 33 basis points (0.33%). And in all probability, the recent severe swoon in biotechnology is probably the cause for that.

While there have always been risks in this, or any sector, the long-run returns have been consistent, and it gives the investor a chance to “do well by doing good.”

S&P 500 Sector Comparison – 5-year Cumulative Return
Sector Ticker 5-year cumulative return
Healthcare XLV 103.44
Consumer Discretionary XLY 95.66
Consumer Staples XLP 79.93
Technology XLK 60.59
Utilities XLU 47.20

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