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Healthcare earnings are poised to accelerate, improving the sector's growth outlook.
M&A activity and strong FDA approvals are supporting pharma stocks.
Hedge fund interest is rising as investors rotate beyond crowded AI trades.
Healthcare ETFs are hitting one-year highs because the sector is benefiting from a solid combination of improving earnings visibility, attractive relative valuations, and a rotation out of overcrowded AI/tech trades into defensive growth.
After years of underperformance, the sector has brightened up over the past one month. State Street Health Care Select Sector SPDR ETF (XLV - Free Report) has surged 6.6% over the past month compared with 3.4% gains seen in State Street SPDR S&P 500 ETF Trust (SPY - Free Report) .
Inside the Rally
Earnings Acceleration
S&P 500 healthcare companies are expected to deliver double-digit earnings growth from Q4 2026 through 2027, a sharp turnaround after years of underperformance. This forward profitability upgrade is drawing fresh institutional flows, per Reuters.
The medical sector is likely to record a 1.7% uptick in earnings on 5.3% higher revenues. The sector is expected to log a 21.2% increase in earnings on 2.2% higher revenues, Zacks Sector and Market Earnings Trends, issued on Aug. 12, 2026. Historically, the sector reported a 12.6% rise in earnings on 10.6% higher revenues in 2025.
Improving Margins
After lagging in early 2026, healthcare now offers “durable growth, technology-like profitability, attractive valuation and diversification benefits” compared with the AI-heavy market leadership, per J.P. Morgan, as quoted on Reuters.
While the healthcare sector has lagged the red-hot technology sector on the margins front in 2025 and 2026, the sector is expected to report a 1.40% margin expansion in 2027 versus the technology sector's expected 0.02% margin expansion, per Zacks Earnings Trends.
Pharma Stocks Enter 2026 H2 On Firmer Footing
Large pharmaceutical companies are entering the second half of 2026 on much firmer footing than they were a year ago. Concerns over tariffs and U.S. drug pricing policies have eased considerably, allowing investors to shift their focus back to company fundamentals.
Meanwhile, despite continued leadership changes at the Food and Drug Administration (FDA), drug approvals have remained healthy, with early indications pointing to a more flexible regulatory environment, per a Janus Henderson report.
Solid Dealmaking
M&A activity is surging. M&A value in the sector has touched nearly $284 billion this year, according to Dealogic, approaching 2025's total of $306 billion and topping every other year since 2021, as quoted on Reuters.
A recent media report indicated that AstraZeneca (AZN) and Bristol-Myers Squibb (BMY) held talks about a possible merger, which could create one of the world's largest pharma companies with a combined value of nearly $400 billion, the same Reuters article noted.
Rising Hedge Funds Investments
Hedge fund bets in favor of healthcare stocks recently neared a five-year high, per a Goldman Sachs note, as cash-rich speculators believe AI-driven breakthroughs and favorable financing conditions will help the sector meaningfully, as quoted on Reuters.
Specialized healthcare hedge funds posted returns of nearly 40% between August 2025 and April 2026, compared with 17% returns for generalist stock-trading hedge funds over the same time frame, per Goldman Sachs, as mentioned in the same Reuters article.
More hedge funds are focusing exclusively on healthcare this year, with the sector accounting for 24% of new fund launches—the highest share since at least 2009, the bank added, as quoted on Reuters.
Fast FDA Approvals
The FDA has accelerated its approval process, with the annual number of new drug approvals in 2025 reaching its highest level since 2020, according to Goldman Sachs, citing data through the end of last year, per the same Reuters article.
Defensive Rotation
In volatile periods and ahead of U.S. midterm elections, investors historically rotate into defensive sectors. Moreover, with many portfolios still concentrated in tech/AI, where valuation concerns persist, healthcare’s lower correlation provides a hedge against volatile days.
ETFs in Focus
Against this backdrop, below we highlight a few healthcare ETFs that have hit a 52-week high lately.
The underlying S&P Pharmaceuticals Select Industry Index represents the pharmaceuticals sub-industry portion of the S&P Total Markets Index. No stock makes up more than 3.71% of the fund. The $519.1-million-fund charges 35 bps in fees.
The underlying index of the fund includes pharmaceutical companies such as manufacturers of prescription or over-the-counter drugs or vaccines. The fund is heavy on Eli Lilly and J&J. The $1.63-billion-fund charges 38 bps in fees.
The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. This fund is also heavy on Eli Lilly and J&J. The $43.8-billion-fund charges 8 bps in fees.
The underlying Dynamic Pharmaceutical Intellidex Index is comprised of stocks of U.S. pharmaceutical companies. $512-million-fund charges 57 bps in fees. No stock makes up more than 5.58% of the fund.
The underlying MVIS US Listed Biotech 25 Index tracks the overall performance of companies involved in the development and production, marketing and sales of drugs based on genetic analysis and diagnostic equipment. The $428.8-million-fund charges 35 bps in fees.
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Image: Bigstock
Healthcare ETFs Are Looking Up: Here's Why
Key Takeaways
Healthcare ETFs are hitting one-year highs because the sector is benefiting from a solid combination of improving earnings visibility, attractive relative valuations, and a rotation out of overcrowded AI/tech trades into defensive growth.
After years of underperformance, the sector has brightened up over the past one month. State Street Health Care Select Sector SPDR ETF (XLV - Free Report) has surged 6.6% over the past month compared with 3.4% gains seen in State Street SPDR S&P 500 ETF Trust (SPY - Free Report) .
Inside the Rally
Earnings Acceleration
S&P 500 healthcare companies are expected to deliver double-digit earnings growth from Q4 2026 through 2027, a sharp turnaround after years of underperformance. This forward profitability upgrade is drawing fresh institutional flows, per Reuters.
The medical sector is likely to record a 1.7% uptick in earnings on 5.3% higher revenues. The sector is expected to log a 21.2% increase in earnings on 2.2% higher revenues, Zacks Sector and Market Earnings Trends, issued on Aug. 12, 2026. Historically, the sector reported a 12.6% rise in earnings on 10.6% higher revenues in 2025.
Improving Margins
After lagging in early 2026, healthcare now offers “durable growth, technology-like profitability, attractive valuation and diversification benefits” compared with the AI-heavy market leadership, per J.P. Morgan, as quoted on Reuters.
While the healthcare sector has lagged the red-hot technology sector on the margins front in 2025 and 2026, the sector is expected to report a 1.40% margin expansion in 2027 versus the technology sector's expected 0.02% margin expansion, per Zacks Earnings Trends.
Pharma Stocks Enter 2026 H2 On Firmer Footing
Large pharmaceutical companies are entering the second half of 2026 on much firmer footing than they were a year ago. Concerns over tariffs and U.S. drug pricing policies have eased considerably, allowing investors to shift their focus back to company fundamentals.
Meanwhile, despite continued leadership changes at the Food and Drug Administration (FDA), drug approvals have remained healthy, with early indications pointing to a more flexible regulatory environment, per a Janus Henderson report.
Solid Dealmaking
M&A activity is surging. M&A value in the sector has touched nearly $284 billion this year, according to Dealogic, approaching 2025's total of $306 billion and topping every other year since 2021, as quoted on Reuters.
A recent media report indicated that AstraZeneca (AZN) and Bristol-Myers Squibb (BMY) held talks about a possible merger, which could create one of the world's largest pharma companies with a combined value of nearly $400 billion, the same Reuters article noted.
Rising Hedge Funds Investments
Hedge fund bets in favor of healthcare stocks recently neared a five-year high, per a Goldman Sachs note, as cash-rich speculators believe AI-driven breakthroughs and favorable financing conditions will help the sector meaningfully, as quoted on Reuters.
Specialized healthcare hedge funds posted returns of nearly 40% between August 2025 and April 2026, compared with 17% returns for generalist stock-trading hedge funds over the same time frame, per Goldman Sachs, as mentioned in the same Reuters article.
More hedge funds are focusing exclusively on healthcare this year, with the sector accounting for 24% of new fund launches—the highest share since at least 2009, the bank added, as quoted on Reuters.
Fast FDA Approvals
The FDA has accelerated its approval process, with the annual number of new drug approvals in 2025 reaching its highest level since 2020, according to Goldman Sachs, citing data through the end of last year, per the same Reuters article.
Defensive Rotation
In volatile periods and ahead of U.S. midterm elections, investors historically rotate into defensive sectors. Moreover, with many portfolios still concentrated in tech/AI, where valuation concerns persist, healthcare’s lower correlation provides a hedge against volatile days.
ETFs in Focus
Against this backdrop, below we highlight a few healthcare ETFs that have hit a 52-week high lately.
S&P Pharmaceuticals SPDR (XPH - Free Report)
The underlying S&P Pharmaceuticals Select Industry Index represents the pharmaceuticals sub-industry portion of the S&P Total Markets Index. No stock makes up more than 3.71% of the fund. The $519.1-million-fund charges 35 bps in fees.
U.S. Pharmaceuticals iShares ETF (IHE - Free Report)
The underlying index of the fund includes pharmaceutical companies such as manufacturers of prescription or over-the-counter drugs or vaccines. The fund is heavy on Eli Lilly and J&J. The $1.63-billion-fund charges 38 bps in fees.
S&P 500 Healthcare Sector SPDR (XLV - Free Report)
The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. This fund is also heavy on Eli Lilly and J&J. The $43.8-billion-fund charges 8 bps in fees.
Invesco Pharmaceuticals ETF (PJP - Free Report)
The underlying Dynamic Pharmaceutical Intellidex Index is comprised of stocks of U.S. pharmaceutical companies. $512-million-fund charges 57 bps in fees. No stock makes up more than 5.58% of the fund.
Vaneck Biotech ETF (BBH - Free Report)
The underlying MVIS US Listed Biotech 25 Index tracks the overall performance of companies involved in the development and production, marketing and sales of drugs based on genetic analysis and diagnostic equipment. The $428.8-million-fund charges 35 bps in fees.