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For the past few years, it seems all that investors care about is tech, artificial intelligence (AI), and growth stocks. The S&P 500 (SNPINDEX: ^GSPC) has nearly a 40% allocation to tech, and many investors have even overweighted that with tech and semiconductor ETFs.
But the recent post-election correction in the Nasdaq-100 has shaken the markets. As a result, we've seen a major rotation into other sectors and areas of the market that have flown under the radar for some time.
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One of those sectors is healthcare, a defensive industry that usually does quite well when markets are volatile and heading lower. Currently, the State Street Healthcare Select Sector SPDR ETF (NYSEMKT: XLV) is up 23% in 2026 and beating the S&P 500's return of 11%.
Does recent defensive leadership suggest that healthcare is set for a strong year ahead?
When people consider hedging against equity risk, they usually think about asset classes like bonds and gold (although commodities have done really well this year). One thing that I think a lot of folks forget about is that you can keep your portfolio's existing equity allocation but tilt it more conservatively. That could mean rotating out of tech and into sectors such as healthcare and consumer staples. It's not necessarily exciting, but it's one that can really work in markets where growth and tech are struggling.
We've seen with sector returns in November that investors aren't abandoning equities. They're rotating with them. And healthcare is one of those sectors they're targeting. It's been working too. UBS recently stated that over the past year, healthcare outperformed the S&P 500 on 85% of the days when the index was down 1% or more.
In short, healthcare has been working when the stock market is down, and healthcare ETFs are worth considering.
Healthcare is one of the sectors that experiences inelastic demand. Whether the economy is in good shape or not, people still need to go to the doctor and get their prescriptions. It's the same as consumer staples, which perhaps, unironically, is also a market-beating sector this year.
United States GDP is still looking strong, but we know that affordability and consumer confidence are at historically low levels. That would suggest a trend of lower discretionary spending as people prioritize necessities. From a macro perspective, that enhances the case for defensive over growth.
But with leadership in Congress changing next year, we don't have a good sense of whether factors like Medicare and Affordable Care Act (ACA) subsidies will get a tailwind or when. It's a potential positive catalyst that I believe will eventually be prioritized.
If you're considering buying the State Street Healthcare Select Sector SPDR ETF here, understand that the short term may be volatile, as it's still tied to the AI trade. But its defensive nature should help it hold up well. Use it to stabilize heavier S&P 500, growth, or tech positions in your portfolio. If you're uncomfortable investing a lump sum after this year's 20%+ run-up, consider dollar-cost averaging over the next three to six months.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This ETF Has Gained 23% This Year. Is It Still Worth Buying in 2026? was originally published by The Motley Fool
