As is widely known, healthcare spending commands a significant chunk of U.S. GDP and that percentage is set to grow in the years ahead, potentially providing a runway for growth for ETFs such as the Health Care Select Sector SPDR ETF (NYSEArca: XLV).
The largest healthcare ETF by assets, XLV seeks investment results that correspond generally to the Health Care Select Sector Index. The index includes companies from the following industries: pharmaceuticals; health care equipment & supplies; health care providers & services; biotechnology; life sciences tools & services; and health care technology.
“U.S. healthcare spending is projected to grow by an annual average rate of 5.4% between 2019 and 2028, compared to an average of 4.5% a year between 2016 and 2018, according to an annual federal report,” reports S&P Global Market Intelligence.
Previously, investors embraced healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities. Some market observers believe the sector’s selloff is overdone and that healthcare stocks could be poised to bounce back.
Looking For Big Numbers
When it comes to the expansion in healthcare spending, the numbers being bandied about are simply massive.
“The expenditures on products and services ranging from medicines to hospital care are projected to climb from approximately $3.6 trillion in 2018 to almost $6.2 trillion by 2028, fueled by increasing costs, according to the report published March 24 by the health policy journal Health Affairs,” notes S&P Global Market Intelligence.
In a decade, all baby boomers in the U.S., or 70 million Americans, will be older than 65, so the healthcare sector will experience a boom in potential clients as an aging demographic increases spending in the coming years. The Centers for Medicare and Medicaid Services calculated that national health spending will grow at an average rate of 5.5% per year until 2027 when it will hit almost $6 trillion.
“Between 2019 and 2028, healthcare spending growth is expected to outpace the annual growth rate for U.S. gross domestic product, which is projected to average 4.3% over the same period. Total healthcare spending is estimated to represent about 19.7% of GDP in 2028, up from 17.7% in 2018,” according to S&P Global Market Intelligence.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.