As AI Valuations Stretch, Health Care ETFs Step Into The Growth Spotlight

Core Viewpoint - Health care ETFs are expected to perform strongly in 2026 as investors become cautious about high-priced AI stocks [1] Group 1: Market Trends - The State Street Health Care Select Sector SPDR ETF (XLV) is experiencing upward momentum due to rising demand for weight-loss drugs, favorable policies, and the sector's defensive characteristics [2] - Health care has regained favor among investors as markets become more selective following a volatile 2025, driven by valuation discipline and improved earnings visibility, particularly in the weight-loss drug market [3] Group 2: Investment Opportunities - Morgan Stanley identifies health care as a potential outperformer, highlighting the increasing adoption of GLP-1 drugs for obesity and diabetes treatment, benefiting large pharmaceutical companies and biotech firms [4] - XLV provides concentrated exposure to major U.S. industry players, including Eli Lilly & Co. and AbbVie Inc, which helps manage volatility while capturing earnings growth from drug innovation [5] - For broader diversification, the Vanguard Health Care Index Fund ETF (VHT) includes hundreds of health care stocks, reducing reliance on any single drug or company, appealing to investors seeking to mitigate stock-specific risk [6] Group 3: Specialized Funds - Biotechnology-focused ETFs like the iShares Biotechnology ETF (IBB) and State Street SPDR S&P Biotech ETF (XBI) are gaining interest, offering leveraged exposure to drug pipelines related to weight management and metabolic diseases [8] Group 4: Defensive Characteristics - The health care sector is attractive not only for growth but also for its defensive qualities, supported by steady demand, aging populations, and recurring revenue streams, especially amid potential policy changes and economic uncertainties [9] - Health care ETFs may serve as a rebalancing tool for investors looking to maintain exposure to innovation while moving away from overheated tech stocks, providing a balance of growth and stability [10]