“Health is wealth,” as the old saying goes, and if you value your mental and physical well-being, that likely rings true for you. Regardless of your age, condition, or financial situation, you likely spend some money on products and services to maintain your health, whether it’s a few bucks at the pharmacy or a major hospital visit. It may seem like an ongoing investment, as with any asset.
This focus on wellness is part of what makes health care a relatively stable part of anyone’s investment portfolio. There’s a consistent demand for health services, and it’s largely unaffected by the economic cycle.
Still, the health care sector has many distinct facets. Not all companies within the sector are defensive or noncyclical. Some, such as those operating in the biotechnology industry, can be considered speculative and risky. Knowing which industries in the sector to invest in and when can help you position your portfolio for growth, mitigate market risk, and take advantage of both stable and speculative opportunities in the market.
What is the health care sector?The health care sector includes a range of companies that offer products and services aimed at maintaining and improving human health. These products and services include pharmaceuticals, medical devices and equipment, and health care services.
Health care’s importance in the broader economyIn addition to providing health-related services for consumers of all ages, the sector employs about 10% of the U.S. workforce, or more than 16 million people.
The biotech industry is at the cutting edge of scientific research and technological advancements, mostly focused on developing drugs, treatments, and devices. This activity can result in more jobs, improved productivity (across all sectors), and a better ability to compete in the global market—all of which contribute to broader economic growth and stability.
How large is the health care sector?Health care is one of the largest 11 Global Industry Classification Standard (GICS) sectors in the stock market. Its market cap stood at about $6.76 trillion as of mid-2024. In 2022, U.S. health care spending reached $4.5 trillion—about $13,500 per person, equal to 17% of the nation’s gross domestic product (GDP).
Industries that make up the health care sectorAccording to financial information provider S&P Global, the health care sector comprises six industries (and 10 subindustries).
Health care equipment and supplies. Companies in this industry manufacture and distribute medical devices, diagnostic equipment, and various medical supplies. Among the big players in this group are:
GE HealthCare Technologies Inc. (GEHC)Intuitive Surgical, Inc. (ISRG)Stryker Corp. (SYK)Health care providers and services. You may be familiar with this segment. It includes hospitals, clinics, urgent care, and other health care facilities, as well as health insurance and other services. The biggest names include:
The Cigna Group (CI)HCA Healthcare, Inc. (HCA) UnitedHealth Group Inc. (UNH)Health care technology. This industry focuses on developing and implementing software and information technology (IT) systems for use in health care. The companies in this segment are varied and frequently included in other sectors and industries. For instance, Teladoc Health, Inc. (TDOC) can be categorized under the health care and IT sectors, while Boston Scientific Corp. (BSX) can be categorized under health care technology, medical equipment, and biotechnology.
Biotechnology. This highly speculative industry sits on the cutting edge of scientific research and new drug and therapy developments. It incorporates living organisms, genetic engineering, and molecular biology to create new products and therapies. Well-known names include:
Amgen Inc. (AMGN)Gilead Sciences, Inc. (GILD)Biogen Inc. (BIIB)Pharmaceuticals. These companies develop and manufacture prescription and over-the-counter medications. The largest are known as “big pharma” and have become household names, including those involved in the COVID-19 vaccine effort:
Pfizer Inc. (PFE)Moderna, Inc. (MRNA)Johnson & Johnson (JNJ)Life sciences tools and services. This industry provides products that support research and development, including lab equipment, analytical instruments, and more. Leaders in this category, like Agilent Technologies, Inc. (A) and Thermo Fisher Scientific Inc. (TMO), aren’t well covered by the financial media and may be less known among the general investing public.
Distinctive aspects of the health care sectorMany factors are unique to the health care sector, including its regulatory environment, research and development (R&D), patent protections, demographic trends, and more.
Companies often cross different sectors and industries. Walgreens and CVS stores may compete for the same customers at your local strip mall, but Wall Street sees the companies differently. Walgreens Boots Alliance (WBA) is lumped in with consumer staples, while CVS Health Corp. (CVS), which acquired health insurer Aetna in 2018, is allocated to health care, reinforcing the concept that many health-related stocks span categories.
Health care stocks encompass different investment strategies. Each industry within the health care sector is distinct, and that uniqueness is more pronounced with stocks. For example, legacy stocks like Johnson & Johnson are considered defensive and noncyclical and have a history of paying dividends. On the other hand, companies like Gilead Sciences and Biogen, among the more speculative stocks in the market, are heavily into research and tend to plow their profits back into R&D rather than reward shareholders with regular payouts.
Tips for investing in health care stocksMatch your health care stocks to the appropriate investing strategy. Some health care stocks, such as those in biotech, work in emerging fields of R&D, making them speculative (potentially high-return, but also high-risk) investments. Some stocks are considered defensive or noncyclical; these are relatively more stable and less volatile in the economic cycle. Some legacy stocks—established companies with staying power—pay high dividends, while others may be involved in many industries and sectors. If you plan to add health care stocks to your portfolio, ensure they match your allocation strategy.
If you’re focusing on innovation, pay close attention to the regulatory risks. Breakthrough therapies and devices can bring substantial growth, but regulatory approvals, rejections, or changes from the Food and Drug Administration (FDA) can cause a stock to soar or crater, depending on the outcome.
Monitor demographic and health trends. The COVID-19 pandemic significantly boosted the market performance of biopharmaceutical and telehealth stocks, including Moderna, Gilead, and Teladoc. Managed care organizations like UnitedHealth and Elevance Health, Inc. (ELV), formerly Anthem, also benefited from increased demand during the three-year pandemic. Aside from these extraordinary events and conditions, demographic shifts and aging populations tend to drive continued growth in various health care industries.
The bottom lineDepending on the stocks you pick, investing in the health care sector can be stable, lucrative, or both. The sector is vast and varied, from basic health-related services to cutting-edge developments in medical science. So if you’re thinking of adding health care stocks to your portfolio, get to know the industries and companies well, make sure they match your investment strategy, and pay attention to the regulatory and health-related trends affecting the sector.
Specific companies and funds are mentioned for educational purposes only and not as an endorsement. The lists in this article are representative and not intended to be comprehensive.