After lagging the S&P 500 Index in each of the past three calendar years, health care stocks have outperformed the benchmark handily since the start of 2025, albeit with a slim loss.
The S&P 500 has declined 14% for the year to date through April 7; health care stocks have lost just 2%.
Our favorite health fund, the Fidelity Select Health Care Portfolio (FSPHX) – a member of the Kiplinger 25, the best no-load mutual funds – lags the sector index for the year to date. But over the past 12 months, the fund outpaced 65% of its peers despite a 6.9% loss.
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Stakes in medical device companies advanced, including shares in Boston Scientific (BSX), as did certain biotech holdings, such as Alnylam Pharmaceuticals (ALNY).
What haven't done well are managed care companies, such as UnitedHealth Group (UNH). Uncertainty about government policy, particularly about Medicare, was a drag.
The other problem: Costs accelerated in 2024 for these firms thanks to inflation, says manager Ed Yoon, and government reimbursements for Medicare Advantage didn't keep pace.
Yoon favors companies with increasing demand for their products or services and improving free cash flow (money left over after operating expenses and spending to maintain or expand the business).
The recent good turn is a rebound after the sector's bad post-election results last year, says Yoon. In the last quarter of 2024, health care stocks sank 10% as the S&P 500 rose 2.4%.
"But the market feels like it's beginning to broaden out, and if that continues, it should bode well for the sector," he adds – before admitting he has said that before.
Still, things have changed in the health sector. While investors weren't looking, "innovation has progressed, and companies that weren't making money are now profitable. That can be a powerful driver for stock prices," Yoon says, adding that much of the sector's change has "gone unnoticed."
Since taking over as manager in 2008, Yoon has posted a 12.5% annualized return, which has outpaced the typical health fund and the S&P 500.
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.
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