Healthcare is not always the most exciting sector to own, and the companies in it grind it out, quarter after quarter, raise dividends quietly, and generally do not produce the kind of explosive returns that technology stocks have delivered in the best years of the past decade. But in the years when markets crack, healthcare tends to remind investors exactly why it belongs in a serious portfolio.
The State Street Health Care Select Sector SPDR ETF (NYSE:XLV | XLV Price Prediction) made that case clearly in 2022. The S&P 500 declined approximately 19.4% that year, while the State Street fund fell approximately 3.3%, an outperformance gap of roughly 16 percentage points.
This kind of defense does not happen by accident. Instead, it is a reflection of what the sector actually does by providing goods and services that people cannot defer regardless of economic conditions.
Why Healthcare Holds Up When Other Sectors Don’t
The structural argument for healthcare as a defensive position comes down to demand inelasticity. People do not stop taking medication because the market is down, and they do not postpone necessary procedures because inflation is elevated.
The revenue base of large-cap pharmaceutical and healthcare services companies is driven primarily by aging demographics and the ongoing prevalence of chronic disease, neither of which responds to the business cycle the way consumer spending or corporate expenditure does.
The fund itself reflects this, and with approximately 60 holdings, the State Street Health Care Select Sector SPDR ETF is concentrated in large-cap names with stable cash flows. Its top five positions are Eli Lilly at 13%, Johnson & Johnson at 11%, AbbVie at 7%, Merck & Co. at 5%, and United Healthcare at 5%.
These are not just speculative biotech companies, they are businesses with decades of operating history, strong dividend coverage, and revenue that does not evaporate in a downturn. As a result, the fund yields 1.71%, paid quarterly, carries a beta of 0.71, and charges just 0.08% per year.
Where Things Stand In 2026
To be direct about the current picture: the State Street Health Care Select Sector SPDR ETF is not repeating its 2022 outperformance in 2026. It is down 5.14% year to date, while the S&P 500 is up over 3%, underperforming by nearly 9%.
The underperformance reflects a combination of factors specific to healthcare this year, including investor rotation toward risk assets following the April selloff, ongoing uncertainty around drug-pricing policy, and earnings pressures on managed-care names. This context matters because it changes how the fund should be framed. Rest assured, this is not a momentum play. It is a defensive position whose value becomes most apparent when markets deteriorate rather than when they rally. The 2022 precedent demonstrates what the fund can do when conditions turn unfavorable.
Investors adding it today are making a forward-looking case that volatility is not finished, not a backward-looking claim that outperformance has already arrived.
The Risks That Come With the Sector
Healthcare carries regulatory risk that most defensive sectors do not face to the same degree. Drug pricing legislation, changes to Medicare and Medicaid reimbursement rates, and patient cliffs on blockbuster drugs all represent real headwinds that can compress earnings for the sector’s largest names in ways that have nothing to do with the broader market conditions.
Eli Lilly and Company’s enormous weighting at nearly 14% also means the fund’s performance is meaningfully tied to that single company’s pipeline and pricing dynamics, which adds concentration risk that investors should acknowledge.
For investors who believe the current period of tariff uncertainty, geopolitical tension, and policy volatility has further to run, the State Street fund offers a historically validated way to stay invested with a lower beta and a dividend yield that provides a partial cushion. The 2022 track record is the most honest argument for owning it, and this record does not guarantee future outperformance, but it does tell you something real about how the fund behaves when the market needs defending.
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