A State Street Fund Excels in Rough Year for Healthcare Stocks

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Despite an early 2024 rally, healthcare shares continue to lag the broad market. Over the past 12 months, the S&P 500 Index climbed 22.1%; health stocks, a modest 13.5%. Enthusiasm about artificial intelligence (AI) stocks sapped investor attention from defensive sectors, including health.

Healthcare remains an attractive sector, although it doesn't move as one block. On the plus side, an ongoing post-COVID ramp-up in patients getting surgery and treatment is boosting health-facility stocks.

Weight-loss drugs and their potential to treat other ailments could lift earnings for key drug players for years. The sector even has an artificial intelligence angle, from accelerating drug research to precision medicine therapies. And though aging demographics is an old story, it remains a growth driver for the sector.

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Why we chose the Health Care Select Sector SPDR ETF

Last month in the Kiplinger ETF 20, our favorite cheap ETFs to buy, we replaced the Invesco S&P 500 Equal Weight Health Care ETF (RYH) with State Street Global Advisor's Health Care Select Sector SPDR Fund (XLV). Both funds hold the same 63 healthcare stocks, but the Invesco fund gives equal stakes to each firm and gained 5.9% over the past 12 months; the SPDR ETF weights each holding by market value and advanced 13.3%.

Size helped over the past year, and we think that trend will continue. Just 15 health stocks beat the S&P 500 over the past 12 months, and most rank among the largest by market cap. Sector heavyweight Eli Lilly (LLY) soared 78% over the past 12 months; biotech giants Regeneron Pharmaceuticals (REGN) and Amgen (AMGN) gained 45% and 46%, respectively.

By contrast, the rest of the sector was a drag. More than 20 stocks lost value over the past year, led by DexCom (DXCM), down 45%, which makes devices for people with diabetes.

Investors can expect the U.S. presidential election to inject some choppiness into health shares. Firms with strongholds in their businesses and heaps of cash on their balance sheets can best navigate that challenge, say BofA Securities analysts.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.