Since the start of the artificial intelligence (“AI”) boom, the healthcare sector has been lagging the S&P 500, with investors parking their funds primarily in mega-cap tech and growth stocks. Healthcare has been one of the S&P 500’s worst-performing sectors over the past two years. It grew just 2.5% in 2024 compared with the benchmark index’s 23.3% jump.
While the healthcare sector's weighting in the S&P 500 has declined to a 25-year low of about 10%, total U.S. healthcare spending has more than tripled in roughly the same period, from $1.4 trillion in 2000 to $4.9 trillion in 2023. The segment has witnessed major technological upheavals that should have a long-standing impact. Growth in key areas like telehealth, surgery, data analytics and biotechnology have aided in a big way.
The current year started with visible underperformance in the sector, channeled by skepticism over the appointment of Robert F. Kennedy Jr. as Health Secretary. However, while RFK Jr. has long been a vaccine skeptic and some of his past comments have criticized groundbreaking drug developments, during the confirmation hearing, he distanced himself from the anti-vaccine movement and voiced support for HIV treatment and prevention drugs. As a result, healthcare as a sector has picked up, with some semblance of confidence returning. In fact, the S&P 500 Health Care Select Sector SPDR (XLV) has grown 6.9% year to date as of March 20, after the bloodbath witnessed in the last quarter of 2024.
An aging population has also helped the sector grow. Moreover, these stocks are considered defensive, meaning they tend to remain stable regardless of the prevalent market conditions. Regular demand for healthcare services is not dependent on the peaks and troughs of a market that has risen and fallen over the past two years over the Fed’s monetary policy.
The healthcare sector is poised for significant long-term changes, including the integration of AI in medical research. The sector also seems lucrative for investors looking for a steady cash flow, as pharmaceutical companies are known to offer regular dividends. While it is not having a great time currently, with the measures in place and the new technology delivering them, the time may be ripe to invest in the sector.
Hence, astute investors should bet on healthcare mutual funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Our Picks
We have thus selected three such healthcare mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000, and carry a low expense ratio.
T. Rowe Price Health Sciences PRHSX primarily invests in the common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences.
Ziad Bakri has been one of the lead managers of PRHSX since April 2016. The fund has 10.3% of its portfolio invested in Eli Lilly, 6.2% in UnitedHealth Group and 5.8% in Intuitive Surgical.
PRHSX’s 3-year and 5-year annualized returns are 3.3% and 8.8%, respectively. Its net expense ratio is 0.80%. PRHSX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Janus Henderson Global Life Sciences JNGLX primarily invests in equity securities issued by companies engaged in life sciences orientation.
Andrew Acker has been the lead manager of JNGLX since April 2007. The fund has 9% of its portfolio invested in Eli Lilly, 6.6% in UnitedHealth Group and 3.7% in Novo Nordisk.
JNGLX’s 3-year and 5-year annualized returns are 7.8% and 10.8%, respectively. Its net expense ratio is 0.80%. JNGLX has a Zacks Mutual Fund Rank #1.
Fidelity Select Pharmaceuticals Portfolio FPHAX primarily invests in stocks of companies principally engaged in the research, development, manufacture, sale, or distribution of pharmaceuticals and drugs of all types. FPHAX advisors use fundamental analysis of factors like each issuer's financial condition and industry position, as well as market and economic conditions, to arrive at their investment decision.
Karim Suwwan de Felipe has been the lead manager of FPHAX since June 2017. The fund has 24.7% of its portfolio invested in Eli Lilly, 15.9% in Novo Nordisk and 9.2% in AstraZeneca.
FPHAX’s 3-year and 5-year annualized returns are 11.8% and 12.1%, respectively. Its net expense ratio is 0.68%. FPHAX has a Zacks Mutual Fund Rank #1.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Get Your Free (PRHSX): Fund Analysis Report
Get Your Free (FPHAX): Fund Analysis Report
Get Your Free (JNGLX): Fund Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research