Healthcare ETFs are down 7% in 2026 even as the S&P 500 gains. With UnitedHealth's collapse, managed care under pressure, and GLP-1 tailwinds intact, we examine whether XLV, VHT, and FHLC still offer a compelling entry point for long-term investors.

Key Highlights

  • Healthcare sector valuations compressed to near 30-year lows in 2025, building a structural case that remains valid despite a sharp 2026 YTD Reversal.
  • XLV is down approximately 7% year-to-date in 2026, underperforming the S&P 500 by roughly 12 percentage points, as managed care Earnings pressure and the UnitedHealth Group collapse weigh on index returns.
  • Healthcare is the only S&P 500 sector reporting a year-over-year earnings decline in Q1 2026, per FactSet data as of May 8, 2026.
  • GLP-1 drug adoption, a durable innovation pipeline, and multi-decade low relative valuations continue to support a medium-term reallocation thesis.
  • ETF structure remains the most efficient vehicle for sector exposure, with broad funds such as VHT and FHLC offering cost-effective Diversification across the full healthcare value chain.

A Rebound Interrupted

Healthcare entered 2026 with momentum. Over the final two quarters of 2025, the sector led all eleven S&P 500 sectors with a gain of nearly 19%, powered by easing drug pricing uncertainty, the mass adoption of GLP-1 weight loss treatments, and a rotation by value-oriented institutional investors away from overextended technology positions. Valuations had compressed to near 30-year lows during the sector's prolonged underperformance in 2023 and 2024, creating what many institutional research desks characterised as a generational entry point.

That momentum has since stalled. Year-to-date in 2026, the Health Care Select Sector SPDR Fund (NYSE Arca: XLV) is down approximately 7%, while the S&P 500 has gained around 5%. The divergence is not a repudiation of the structural thesis, but it is a reminder that the path from suppressed valuations to re-rating is rarely linear. Two specific events have interrupted the recovery: a collapse in managed care earnings driven by persistently elevated medical cost ratios, and the fallout from UnitedHealth Group's (NYSE: UNH) January 2026 results, which delivered the company's first projected annual Revenue decline in more than a decade.

For investors with a medium to long-term horizon, the question is whether this represents a temporary setback within a durable recovery or a deeper structural deterioration. The evidence, on balance, points to the former.

What Changed in 2026

The managed care subsector has been the primary source of disruption. UnitedHealth Group, the largest component of most broad healthcare indices, reported a medical cost ratio of 89.1% for full-year 2025, up significantly from 85.5% in 2024, reflecting persistently elevated utilisation that exceeded actuarial assumptions. The company's 2026 revenue guidance of greater than $439 billion implies a decline of approximately 2% year-over-year, the first contraction in over thirty years. The market reaction was swift and severe, with UNH shares falling roughly 20% in a single session and dragging managed care peers including Humana (NYSE: HUM) sharply lower.

Beyond managed care, the One Big Beautiful Bill Act, passed in 2025, has introduced additional complexity. Changes to Medicaid and Medicare Advantage reimbursement structures, alongside the expiry of enhanced Affordable Care Act premium subsidies, are reshaping the financial outlook for insurers and hospital operators. These legislative shifts have added a new layer of policy uncertainty that was not fully priced into the late-2025 rally.

Compounding the difficulty, healthcare is the only S&P 500 sector reporting a year-over-year earnings decline in Q1 2026, a reversal from Q3 2025, when the sector posted the highest earnings beat rate in at least two years at 13% above consensus estimates.

The Structural Case Has Not Broken

Despite the near-term disruption, the fundamental drivers underpinning the medium-term thesis remain intact.

Valuations have not meaningfully re-rated upward relative to history. The sector continues to trade at a significant discount to both the broader market and its own historical multiples. Large-cap pharmaceutical names carry trailing price-to-earnings ratios that are a fraction of those commanded by dominant technology names, despite offering more predictable cash flows and inelastic end Demand.

The GLP-1 adoption curve continues to expand. Semaglutide-based therapies for obesity and diabetes have moved decisively into mainstream clinical practice, and the Downstream commercial implications for pharmaceutical developers, diagnostics companies, and adjacent therapeutics remain substantial. This category is reshaping revenue forecasts in ways that are still being absorbed by consensus models.

The innovation pipeline across oncology, rare disease, and medical technology remains productive. Clinical trial success rates in biotech improved in 2025, and M&A activity has accelerated, with biotechnology recording the highest number of deal targets across all S&P 500 sectors in 2025. Large-cap pharmaceutical companies are deploying Balance Sheet capacity to Fill therapeutic pipelines ahead of significant Patent expirations expected through 2030.

The ETF Landscape: Where to Gain Exposure

For investors seeking broad sector exposure with managed risk, Exchange-traded funds remain the most cost-efficient vehicle. The choice of fund determines the risk profile materially.

Broad U.S. funds provide the foundational building block. The State Street Health Care Select Sector SPDR Fund (NYSE Arca: XLV) tracks approximately 62 S&P 500 healthcare companies with an expense ratio of 8 basis points. Its market-cap weighting means that the managed care disruption, particularly through its UNH exposure, has been a meaningful drag on 2026 returns. The Vanguard Health Care ETF (NYSE Arca: VHT) covers approximately 400 holdings with a 10-basis-point fee, offering broader exposure that partially dilutes the UNH concentration risk. The Fidelity MSCI Health Care Index ETF (NYSE Arca: FHLC) tracks a similar universe of approximately 392 names at 8 basis points, making it a close functional equivalent to VHT. Year-to-date, both FHLC and VHT have posted declines of approximately 6.5% to 6.8%, slightly outperforming XLV, reflecting the benefit of broader diversification in a period of large-cap specific stress.

Global diversification is available through the iShares Global Healthcare ETF (NYSE Arca: IXJ), which tracks the S&P 1200 Global Healthcare Index. This fund provides access to European pharmaceutical names with significant GLP-1, oncology, and biosimilar pipelines that are absent from U.S.-only products. The trade-off is cost: IXJ carries an expense ratio of 40 basis points, roughly six times that of the domestic broad funds. Year-to-date, IXJ has declined approximately 6.1%, modestly outperforming its U.S. peers, reflecting the relative resilience of European pharmaceutical holdings in the current environment.

Sub-sector concentration is available for investors with a defined view on specific segments. The iShares U.S. Pharmaceuticals ETF (NYSE Arca: IHE) concentrates on domestic drug and Vaccine manufacturers, isolating pharmaceutical exposure while avoiding the managed care drag. Healthcare technology-focused funds, including those tracking medical robotics and digital health platforms, have shown relative resilience given the sector's distance from the insurance and reimbursement pressures that have driven index-level underperformance.

Risks That Remain Elevated

The risks to a near-term recovery are meaningful and should not be minimised. The managed care subsector has not yet stabilised. Medicare Advantage reimbursement rates for 2027 are still being negotiated, and any further deterioration in government payment assumptions could extend the earnings pressure into 2027.

Drug pricing risk has been partially resolved by the Most Favored Nation framework, but the Inflation Reduction Act's negotiated pricing provisions continue to apply downward pressure on pharmacy benefit margins, and the broader legislative agenda around pharmaceutical reform remains active. A renewed escalation could compress pharma multiples further.

The sector also lacks the AI revenue exposure that has driven outperformance in technology and communication services this year. Healthcare's AI adoption is real but diffuse, manifesting primarily as cost reduction in administrative functions rather than as a direct revenue catalyst. In a market environment that continues to reward AI-visible earnings growth, healthcare remains structurally disadvantaged in the near-term narrative.

Opportunity Within Disruption

The 2026 YTD underperformance has reopened the valuation gap that the late-2025 rally had partially closed. For investors who missed the initial entry point in mid-2025, or who were reluctant to add exposure ahead of the managed care disruption, current conditions may represent a second opportunity to build positions at attractive relative valuations.

The structural thesis has not changed. An ageing population, expanding chronic disease burden, accelerating drug innovation, and multi-decade low relative valuations provide a durable medium-term foundation. The near-term headwinds from managed care disruption and legislative uncertainty are real, but they are subsector-specific and unlikely to permanently impair the sector's earnings quality at the aggregate level.

ETFs with broader diversification, lower managed care concentration, and global pharmaceutical reach may offer a more balanced risk profile during the current period of subsector stress than their more concentrated, S&P 500-anchored counterparts.