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ETF Specialist

Where Are the Opportunities in U.S. Health Care?

As the sector has continued to best the broader market, a look both at the dynamics that would drive further outperformance by the sector and at funds that investors can use to tap those themes.

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Since the start of 2014, the U.S. health-care sector has continued its recent track record of outpacing the broader U.S. equity market, topping the S&P 500 Index by more than 400 basis points. Over the past three years, health-care stocks have in aggregate bested the broad benchmark by 500 to 600 basis points each year.

There are several reasons for the health sector's strong performance over the past few years. Some of it relates to low valuations in 2010 of pharmaceutical stocks--which make up anywhere from 40% to 45% of the sector--as a result of investor fears in advance of U.S. health-care reform and a wave of major patent losses. Ultimately, the drug companies adapted to both headwinds better than expected. In addition, drug companies have enjoyed benefits from a shift in focus that they implemented between seven and 10 years ago after payers decided to reimburse less for slight enhancements to approved drugs, which up to that point had been a big focus of the majority of pipelines. That prompted drugmakers to shift their pipeline focus toward unmet medical needs such as cancer and hepatitis C. Now, those drugs are coming to the market now, and pharmaceutical firms are seeing the fruits of those innovations. That has resulted in an improved growth outlook for drug and biotech firms.

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Robert Goldsborough does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.