The health care sector is one of the largest in the U.S. — and that’s not expected to change anytime soon. Health spending is expected to reach nearly $4.9 trillion in 2024.
What are health care stocks?
Health care stocks are shares of publicly-traded companies that offer products and services in the medical industry. Health care stocks include things like hospitals and other medical properties, biotechnology companies, medical equipment companies and insurance companies.
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9 best health care stocks by one-year performance
Below is a list of nine of the best-performing health care stocks in the S&P 500, ordered by one-year performance.
Ticker | Company | Performance (Year) |
|---|---|---|
UHS | Universal Health Services, Inc. | 76.27% |
LLY | Lilly(Eli) & Co | 75.19% |
ISRG | Intuitive Surgical Inc. | 54.63% |
BSX | Boston Scientific Corp. | 50.71% |
RMD | Resmed Inc. | 49.24% |
DVA | DaVita Inc | 46.08% |
REGN | Regeneron Pharmaceuticals, Inc. | 41.89% |
HCA | HCA Healthcare Inc | 41.40% |
VRTX | Vertex Pharmaceuticals, Inc. | 41.38% |
Source: Finviz. Data is current as of market close on Aug. 30, 2024, and is intended for informational purposes only, not for trading purposes.
Types of healthcare stocks
Health care stocks can be broken down into a few different industries. Here are a few:
Health care facilities and operators
When most people hear the term “health care,” the first thing that comes to mind is often a hospital. And some health care stocks are companies that own or operate hospitals, other health care facilities and provider organizations.
Some of these, such as Medical Properties Trust, are real estate investment trusts, or REITs, which own hospital buildings and lease them to operators.
Others, such as Tenet Healthcare, are operators that hire and manage doctors, nurses and technicians to provide health care services to patients.
Biotechnology and pharmaceuticals
The biotechnology and pharmaceutical industries produce drugs.
Technically, biotechnology and pharmaceuticals are different things — pharmaceuticals are made from chemicals, while biotechnology is made from living organisms. But in an investing context, “biotech” and “pharma” are used more or less interchangeably.
For more information about these industries, check out our guide to biotech stocks.
Medical equipment
Medical equipment companies produce non-drug health care products. This industry can further be broken down into medical supply companies and medical device companies.
Medical supply companies, such as Patterson Companies, produce and distribute basic products that are used in day-to-day hospital work, such as latex gloves and antimicrobial cleaning supplies.
Medical device companies, such as Medtronic, design and manufacture machines that are used to treat specific health issues, such as pacemakers and ventilators.
Health insurance and pharmacy benefit management
Health insurers and pharmacy benefit managers are sometimes collectively referred to as “payers,” as their role is to arrange payment for health care services.
Most people are probably familiar with health insurance companies such as UnitedHealth Group. After all, the majority of Americans have private health insurance, which involves paying premiums to an insurer in exchange for the insurer paying for most health care services.
Pharmacy benefit managers like ExpressScripts coordinate between insurers, drug companies and health care providers to deliver medications to patients at the lowest price possible (while still making a profit).
Pros and cons of investing in health care stocks
Many health care stocks offer investors stability and profitability in both good times and bad. But the sector is not without its risks — particularly when the government is involved.
Pros of health care stocks
Recession resistance: No sector is fully recession-proof, but health care holds up better than most during economic downturns. A 2021 paper from the National Bureau of Economic Research found that health care hiring holds steady during recessions, and sometimes even increases.» More on preparing for a recession: What are the closest things to recession-proof stocks?
Dividends: Health care providers, insurers and established biotech, pharmaceutical and medical equipment companies often have substantial cash flows from which they can pay dividends. About 10% of the dividend aristocrats — S&P 500 stocks that have increased their payouts annually for at least 25 years — are health care companies.
Cons of health care stocks
Political risk: About 8% of Americans lacked health insurance in 2022. More than 40% were underinsured — meaning they were unable to afford health care even with insurance, or had a gap in coverage. Universal health care has been a major topic of discussion in the last few elections, and some proposed reforms — such as Medicare for All — would reshape the sector in a way that might hurt investors, for better or worse.
Regulatory risk: Even in today’s privatized U.S. health care system, regulatory actions can make or break a health care company. Failure to win FDA approval can doom an experimental biotech, pharma or medical device company, and many hospitals are dependent on funding from Medicare and Medicaid to continue operating.
How to buy health care stocks
The first step to invest in health care stocks is to open a brokerage account. Then, you’ll need to figure out how you want to invest. That could mean buying individual stocks or buying funds.
Individual health care stocks
It might be tempting to invest in specific health care stocks — after all, many of the stocks listed above have quite well in recent years.
But betting too much on an individual stock can be risky — and buying several individual health care stocks can be expensive. Individual stock-pickers also need to research stocks before buying, which can be time consuming.
Health care stock ETFs
Another way to get the benefit of investing in several health care stocks is through an exchange traded fund, or ETF — of which dozens are available.
Some health care ETFs, such as the Health Care SPDR Select Sector Fund, are sector-wide ETFs — basically, health care index funds — that include companies from all of the industries discussed above.
Others are more industry-specific. The iShares U.S. Medical Devices ETF, for example, is focused on the medical-devices industry.
Researching an ETF is generally much quicker than researching each individual stock in that ETF — but it’s still important to do. Consider looking up an ETF’s portfolio before investing.
Options and health care stocks
Health care stocks often pay dividends — and advanced investors may be able to generate even more income from them by selling options. That might mean selling put options on health care stocks they want to buy, or selling covered calls on health care stocks they already own.
Check out our guide to options trading to learn more.
Frequently asked questions
What are some investment differences between different types of health care stocks?
Not all health care stocks behave the same way in a portfolio. Big companies, like insurers and facilities operators, are generally less volatile than small companies like biotech startups, and more likely to pay dividends. However, the higher risk for small companies comes with the possibility of higher rewards in terms of capital gains.
Would health care reform hurt all health care stocks?
The effects of government policy changes on health care stocks are more complex than you might think, and history suggests that the sector is good at adapting to big reforms. The Health Care SPDR Select Sector Fund actually outperformed the S&P 500 in the decade after the Affordable Care Act was passed in 2010.
Are profits from health care stocks tax-exempt?
No. Certain health care expenses can be deducted from your taxes under certain circ*mstances, but any profits you earn from health care stocks are just as taxable as any other stock profits — unless you earn them in a tax-advantaged account.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
