2022 was a really weird year to be an investor. Even four years later, I still remember what happened. A lot of investors were panicking because their supposedly balanced 60/40 portfolios of 60% stocks and 40% bonds were falling almost as much as the stock market itself. At its low point that year, the S&P 500 drew down roughly 19%, and bonds were not providing much shelter either.
What happened was that inflation surged far beyond the Federal Reserve’s long-term target, forcing interest rates sharply higher. As rates rose, both stocks and bonds sold off together. In other words, the diversification many investors thought they had simply did not work when they needed it most.
As a result, many investors started looking elsewhere for protection. Low-volatility factor ETFs gained attention. Covered call strategies became extremely popular for their income generation. Buffer ETFs also exploded in popularity because they explicitly tried to limit downside losses with options.
Personally, though, I do not think you necessarily need complex alternatives to reduce risk in your portfolio, even in periods where bonds fail to diversify equities properly. There is also a case for simply allocating more towards defensive sectors of the economy, sectors where demand tends to remain relatively stable regardless of the economic cycle.
One good example is the Health Care Select Sector SPDR Fund (NYSEARCA: XLV). It is one of the largest sector ETFs on the market today with more than $37.5 billion in assets under management, and it remains very affordable with a 0.08% expense ratio.
Some readers may recognize it as making up 20% of my “cockroach portfolio” alongside allocations to consumer staples, utilities, gold, and Treasury bonds. Today, though, I want to focus on XLV specifically because in 2022, it held up significantly better than the broader market.
If you look back historically, that was not the only bear market where healthcare stocks provided meaningful downside protection. Here is what the data says about XLV as a defensive allocation and how I think retirees can potentially incorporate it into a retirement portfolio.
XLV Versus the S&P 500 Over 27 Years
The cool thing about XLV is that it is almost as old as the very first U.S.-listed ETF, the State Street S&P 500 ETF Trust (NYSEARCA: SPY). Using data courtesy of Testfolio.io going back from December 22, 1998 to May 18, 2026, we can get a very long-term look at how healthcare stocks behaved versus the broader market.
The first thing that stands out is that over this nearly three-decade period, XLV actually kept up with SPY reasonably well. XLV delivered an 8.21% annualized return versus 8.71% for SPY. So yes, it lagged somewhat, but the tradeoff was materially lower risk.
The metric I really want to focus on first is maximum drawdown. This measures the largest peak-to-trough decline each ETF suffered over the full period. During the 2008 financial crisis, SPY fell 55.2% at its worst point. In contrast, XLV declined significantly less at 39.17%.
I want to emphasize this point again because it matters. XLV is still a 100% stock ETF. There are no bonds helping cushion the downside. There are no options overlays or fancy hedging strategies. It is still fully exposed to equities, yet historically it held up materially better during severe market stress.
And 2008 was not the only drawdown investors experienced. That is where average drawdown becomes useful. Instead of focusing on the single worst event, it measures how much each ETF declined on average across all market pullbacks over this 27.4-year period. Again, XLV came out ahead. SPY experienced an average drawdown of 11.62%, whereas XLV averaged just 7.64%.
There are a few other statistics worth highlighting as well. The longest drawdown period for SPY lasted 6.57 years, meaning that investors who bought at the wrong time would have remained underwater for more than half a decade had they not panic sold. XLV shortened that recovery period to 5.41 years.
Finally, we should look at beta, which measures sensitivity to the overall market. SPY naturally carries a beta of 1 because it effectively is the market. XLV, meanwhile, comes in at just 0.73. In practice, that means healthcare stocks historically moved only about three-quarters as aggressively as the broader market. The defensive characteristics are very real.
Why XLV Has Historically Been Defensive
A lot of this simply comes down to the businesses XLV owns. SPY holds all 11 sectors weighted by market capitalization, while XLV only owns healthcare companies, also weighted by market capitalization. Right away, this biases the ETF toward larger blue-chip healthcare firms. Moreover, because XLV selects its holdings from the S&P 500 universe, it already benefits from the screening standards required for inclusion, including liquidity, size, and a demonstrated record of earnings consistency.
The ETF spans a variety of healthcare industries including pharmaceuticals, healthcare equipment, healthcare providers, biotech, life sciences tools, and healthcare technology. And with the exception of certain biotech companies, many of these industries tend to have relatively inelastic demand.
That means consumers still need these products and services regardless of economic conditions. People continue buying prescription drugs during recessions. Hospitals still require medical equipment. Healthcare providers still treat patients. This tends to create more stable earnings streams with fewer dramatic surprises quarter to quarter, which in turn can reduce volatility.
Of course, XLV is not immune to risk. Healthcare still faces sector-specific headwinds including regulation, drug pricing pressure, litigation risk, and biotech volatility. That is why in my own “cockroach portfolio,” I balance healthcare alongside consumer staples, utilities, gold, and Treasury bonds rather than relying on it alone.
Still, if your goal is to tilt a retirement portfolio more defensively without introducing derivatives or complex strategies, I think XLV remains one of the better candidates available. A big part of that comes down to the basics. It is highly liquid, easy to understand, inexpensive, and historically has demonstrated lower downside participation than the broader market.
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