Healthcare Stocks Are on Fire -- Don't Miss These Opportunities

The healthcare sector just had its best week in six months.

The State Street Health Care Select Sector SPDR ETF (NYSEMKT: XLV), which tracks the healthcare sector of the S&P 500 index, is up 3.3% over the past five trading sessions. That blows away the performance of the broader market -- the S&P 500 is up less than half a percentage point over the past week. And it makes healthcare the top-performing sector in the index for the week.

What's suddenly driving healthcare stocks higher?

Well, several factors seem to be at play.

First, the pharmaceutical firms continue to innovate and develop new blockbuster drugs.

Image source: Getty Images.

Drugmaker Merck (NYSE: MRK) soared this week after it announced that a lung cancer drug it is developing with a Chinese partner cut the risk of tumor progression by 65% in a Phase 3 study.

And the Centers for Medicare and Medicaid Services recently announced it will provide Eli Lilly's (NYSE: LLY) GLP-1 drugs, Zepbound and Mounjaro, to Medicare patients for $50 a month beginning in January 2027. Shares of Lilly have soared 25% over the past three weeks.

UnitedHealth Group (NYSE: UNH), the largest U.S. health insurer, has rebounded sharply this year -- it's up more than 17% year to date due to impressive first-quarter results in which the company beat Wall Street expectations for both revenue and earnings, and increased full-year guidance on earnings. And the company is at the forefront of industry efforts to employ artificial intelligence tools to become more efficient and profitable.

Even better, in April, the Trump administration announced it would increase Medicare Advantage payments by 2.48% in 2027, or about $13 billion. That increase is significantly higher than the government's initial estimate of 0.09%. UnitedHealth is the largest Medicare Advantage provider.

Health stocks are benefiting from some sector rotation

In addition, there seems to be sector rotation taking place, with investors rebalancing their portfolios away from pricey tech stocks and into healthcare stocks, which are generally cheaper on a price-to-earnings basis. And given surging inflation and ongoing geopolitical uncertainty, some investors are seeking the safety of the healthcare sector, which, like other defensive sectors, tends to hold up well when the economy falters.

The entire healthcare sector is well-positioned with respect to demographic trends, too. The world's population is aging, which is driving growing global demand for pharmaceuticals, medical devices and services, and health insurance.

For that reason alone, all of the stocks mentioned here are smart investments.

Of course, the health sector is highly competitive as well. For example, multiple companies are developing new GLP-1 drugs to rival Eli Lilly.

That's why healthcare ETFs are a great way to play the boom in the healthcare industry. I like the State Street Health Care Select Sector SPDR ETF because it tracks the largest healthcare stocks and is highly diversified.

The ETF's largest holdings are, as you would imagine, the biggest companies by market cap in the S&P 500 healthcare sector. Drug giant Eli Lilly accounts for 15.4% of the fund, healthcare products maker Johnson & Johnson (NYSE: JNJ) is at 10.4%, biopharmaceutical firm AbbVie (NYSE: ABBV) is around 7%, and UnitedHealth Group is about 6.5%. The fund holds more than 60 different stocks.

Given demographic trends and the impressive innovation taking place in the health industry, every smart investor should have some exposure to this booming sector.

Matthew Benjamin has positions in Select Sector SPDR Trust-State Street Health Care Select Sector SPDR ETF. The Motley Fool has positions in and recommends AbbVie, Eli Lilly, and Merck. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool has a disclosure policy.