Daniel Garofalo, Director - Ameriprise Wealth Management Solutions Research, Equity
- The health care sector offers investors an attractive blend of defensive and growth attributes.
- A number of larger health care companies have experienced relatively modest business disruptions during the pandemic.
- Your Ameriprise advisor can help you determine if a health care equity allocation is consistent with your long-term investment strategy.
Investments in the health care sector are just one piece of a diversified, long-term portfolio. The sector offers a unique blend of growth prospects and defensive attributes that may help your portfolio perform through a variety of market conditions.
Spending on health care services will steadily rise
Unlike more economically sensitive sectors, health care services spending typically grows 4-6% annually, even during economically challenged periods such as 2008 and 2009.1
Forecasts suggest the population of older individuals will rise over the next decade, leading to increased demand for health care goods and services. Based on 2017 United States Census Bureau estimates, approximately 56.1 million Americans are 65 years of age or older in 2020, and this number will increase to 73.1 million by 2030.2 According to the Centers for Medicare and Medicaid Services, health care spending per person among individuals aged 65 or older is almost three times as much as spending among working-age adults.3
Innovations demonstrate critical role of health care
Health care also tends to be one of the more innovative sectors in the S&P 500® Index, and the current COVID-19 pandemic has reminded investors that health care innovations serve a critical purpose in society.
In recent months, there have been many headlines regarding potential diagnostic tests, therapeutics and vaccines to address the pandemic. The FDA granted emergency approval for several diagnostic tests for the underlying virus, as well as tests for antibodies that indicate whether an individual has been exposed to the virus. At least one therapeutic option also received emergency FDA approval, and work to develop a vaccine continues.
Collectively, these innovations serve as tools for the industry to combat COVID-19 in the months ahead. If the virus returns in the future, as many experts predict, the disruptions to society could be less severe if the health care innovations prove effective and are widely available.
Considerations for your portfolio
The health care sector outperformed the stock market this year through May.4 Many large health insurance, biotechnology and pharmaceutical companies experienced relatively modest business disruptions, such as delays to clinical trials. These companies tend to be high-quality businesses with strong financials that often support attractive, growing dividends for shareholders.5
The most significant disruptions to the sector have taken place at hospitals and surgery centers, where medical procedures such as stents, heart valves and orthopedic surgeries were delayed in many areas of the country due to the pandemic. However, by the first week of May, more than 80% of states began to allow medical procedures to resume.6 Many larger health care equipment companies expect medical procedure volumes to gradually return to normal by the end of this year. If that happens, stocks of these companies may be attractive long-term investments within a diversified portfolio.
Your Ameriprise financial advisor can help you determine if a health care sector investment is right for your portfolio. This may include dedicated health care sector mutual funds, exchange traded funds or individual stocks, depending on your personalized investment strategy based on your goals, risk tolerance and time horizon.
1 American Medical Association, March 2019.
2 U.S. Census Bureau, February 2020.
3 Centers for Medicare and Medicaid Services, March 2020.
4 Performance of S&P 500® Health Care Sector Index compared to S&P 500® Index per FactSet.
5 EPS performance of S&P 500® Pharmaceutical industry, Biotechnology industry and Managed Health care sub-industries compared to S&P 500® Index in 2020 per FactSet.
6 American Medical Association, May 2020.