• 15 Nov, 2025
• Dr. Mahdi Khazaei

Are Healthcare ETFs Ready for a Comeback or Just Catching Their Breath?

Healthcare has always been a strange hybrid in the market. It offers the stability of recurring demand but the drama of innovation cycles that can swing earnings wildly. After two years dominated by artificial intelligence and technology stocks, healthcare’s relative silence has made it look dull. That may now be the reason it looks interesting again. When momentum cools elsewhere, capital tends to circle back to steady cash flow and discounted valuations—and that is where healthcare finds itself today.

According to Reuters, fund managers have begun dipping back into the sector. The logic is simple: earnings are still growing, margins are holding, and valuations have compressed. The S&P 500 trades at about twenty-two times forward earnings, while large-cap healthcare now sits near seventeen. That discount has not been this wide since 2018. For portfolio managers who missed the AI rally or want to reduce exposure to richly priced tech, healthcare looks like the next logical stop.

Exchange-traded funds are often the first place that shift shows up. The Health Care Select Sector SPDR Fund (XLV), which holds giants like UnitedHealth, Johnson & Johnson, and Eli Lilly, has seen modest inflows since July after months of outflows. The iShares U.S. Healthcare ETF (IYH) and Vanguard Health Care ETF (VHT) have also ticked higher, helped by dividends and a small rebound in big pharma. These are not explosive moves, but they hint at a change in sentiment. Passive investors tend to be cautious; they move when they believe downside risk has mostly been priced in.

Under the surface, the sector is being pulled in two directions. Drugmakers remain under pressure from patent expiries and the U.S. government’s drug-price negotiation program, which continues to create headlines and uncertainty. At the same time, devices and diagnostics are enjoying a rebound as elective procedures rise and hospitals return to normal schedules. Companies like Abbott, Intuitive Surgical, and Stryker have posted solid results, showing that pent-up demand for surgeries is still playing out. For ETF investors, this creates a classic barbell: lagging pharmaceuticals on one side, steady device makers on the other.

The weight-loss boom adds another wrinkle. Investors who once saw obesity drugs as a biotech story are now treating them as a healthcare macro theme. Novo Nordisk and Eli Lilly continue to dominate, but their success has spilled over into suppliers, testing companies, and logistics providers that form part of the ETF ecosystem. Analysts say this ripple effect could support sector earnings even if pricing pressure squeezes margins later on. In other words, the story is broadening beyond a few ticker symbols.

What makes healthcare ETFs attractive at this stage is not explosive growth but resilience. In a market where investors are paying high multiples for every hint of innovation, healthcare offers reliable demand, balance sheets flush with cash, and exposure to demographic trends that are not going away. Populations are aging, chronic disease is rising, and governments are spending more on healthcare infrastructure. Those forces make drawdowns temporary rather than permanent.

Still, a few caution flags remain. Political risk will increase as the U.S. election approaches. Drug pricing and Medicare coverage will likely feature in campaign debates, which could trigger volatility for pharmaceutical-heavy ETFs. Hospital chains also face labour cost inflation and potential reimbursement adjustments. And while the sector’s valuation discount looks appealing, it can stay wide for longer if investors continue to chase tech momentum.

For now, the case for healthcare ETFs comes down to timing and temperament. If you are looking for short-term excitement, there are flashier trades. But if you want a steady allocation that can weather multiple economic cycles, this may be a moment to look again. The sector’s earnings base is intact, dividend yields are attractive, and the recent pullback has created room for new buyers.

In past cycles, healthcare has often been the quiet performer that outlasts the hype. The same may be true again. Whether the next six months bring a full rotation or just a pause before another round of tech enthusiasm, the groundwork for a comeback is being laid in slow, patient flows of ETF capital.

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