6 Ways Investors Can Cash in on Bouncing Healthcare Stocks
Healthcare stocks are flying. Over the past 12 months, the sector has gained 23%, outpacing the 15.7% return in the S&P 500 Index.
It’s about time. Until last year, the sector had been in a prolonged slump. The biotech bubble that followed the COVID vaccine launch burst in 2021, setting off a four-year “biotech winter,” says Finny Kuruvilla, co-chief investment officer at Eventide Asset Management.
An epic rise in interest rates in 2022 didn’t help (biotech firms are big borrowers). The S&P Biotechnology Select Industry Index sank a cumulative 63% from its peak in early 2021 to a low in 2025.
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Meanwhile, uncertainty about drug pricing weighed on pharmaceutical shares. And problems that arose after the pandemic hindered many healthcare product makers (supply gluts) and insurers (spikes in demand for care). Between early 2022 and mid-2025, the S&P 1500 Health Care Index returned a scant 1.0%, cumulative. The broad U.S. stock market, by contrast, gained 43%.
But the industry has moved beyond those troubles, and today, a wave of innovation, a string of mergers and acquisitions, and an improved outlook for the sector’s earnings growth are coalescing to push healthcare shares higher.
The sector is broad, however. Some industries stand to benefit more than others from these trends — namely biotech and adjacent businesses, including select pharmaceuticals and life science tools companies, which provide the instruments biotech firms need to develop new drugs.
“Biotech is in a strong position,” says Sal Rais, manager of the T. Rowe Price Health Care exchange-traded fund.
Growth drivers for healthcare stocks
Over the years, genetic and scientific discoveries have led to slew of new techniques to treat diseases, and biotechnology is the engine behind it all. “The toolbox to develop drugs is getting broader,” says Rais. “We’re able to make targeted, more effective, safer drugs faster than we’ve ever been able to do.”
In 2026, the efficacy of two new drugs — one recently approved, the other in late-stage trials — has electrified the industry. And the way the drugs work is the stuff of science fiction.
A recently approved pancreatic cancer pill, Rasonque, for instance, more than doubles the overall survival period, to 13.2 months, compared with those undergoing chemotherapy, the standard of care. “That’s astonishing data,” says Eventide’s Kuruvilla. The tablet, by Revolution Medicines (RVMD), targets the specific proteins that fuel tumor growth and essentially shuts them off, slowing cancer growth.
Recent results from Moderna (MRNA) and Merck (MRK) for a new skin cancer protocol also rocked the biotech world. The Moderna shot is custom-made using a patient’s own tumor tissue, and it trains his or her immune system to recognize and fight cancer cells; it’s administered alongside Merck’s Keytruda immunotherapy treatment.
In early trials, those getting the two-fisted treatment had a 49% lower chance of recurrence or death than patients taking only Keytruda.
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A step-up in the pace of mergers-and-acquisitions deals is also propping up stocks in the sector. Drugmakers are set to experience “their biggest patent cliff ever,” says Rais, starting in 2028 and lasting through 2032.
When a pharmaceutical firm loses exclusive rights to make a drug, revenues fall dramatically because other companies can make generic versions of it. “The need for big drug companies to feed their pipelines is the greatest it has ever been, so they’re acquiring biotech companies,” says Rais.
Drug companies made 26 deals in 2025; in 2026, the count topped 50 biotech acquisitions by midyear. Eli Lilly (LLY), for example, has been on a spree this year, acquiring more businesses in the first half of 2026 than in all of last year.
Lilly chief executive David Ricks told financial network CNBC that “not all of these bets will pay off.” But the ones that do will help the company grow well into the 2030s.
Finally, though some industry insiders are wary, China has become a “phenomenal superpower” in drug development, says Eventide’s Kuruvilla, and it is now a source for deals, too.
Armed with impressive clinical trial data, Chinese biotech firms have been reaching out to U.S. and European companies to build partnerships. For example, in 2024, U.S. biotech firm Kailera Therapeutics licensed the rights outside of Greater China to develop, make and market a promising weight-loss drug from Jiangsu Hengrui Pharmaceuticals. The U.S. firm then leveraged that asset to raise $625 million in a public offering in April 2026.
Driven by the fastest-growing healthcare industries, the outlook for the broad sector’s earnings is on the upswing. Analysts currently project the healthcare sector to post 21.9% year-over-year earnings growth in 2027, says Matthew Bartolini, State Street Investment Management global head of research strategists, a pace that beats every sector but technology. “And those numbers have been revised upward recently,” he adds.
The biotech industry is on an even faster track — analysts expect 47.7% growth in earnings in 2027. By contrast, predictions for the S&P 500 are more modest, at 15.1%. “Overall, the opportunity set in healthcare is pretty amazing,” says T. Rowe Price’s Rais.
Of course, rising interest rates could squeeze those earnings-growth projections. But State Street’s Bartolini says a strong economy and continued upward revisions for earnings growth in the healthcare sector could “counterbalance” the increased cost of debt that higher rates bring.
Firms that “got burned” in the last rate-hike environment may now hold enough cash on hand for three to five years, instead of just six months, says Kuruvilla. Plus, adds Rais, drug innovation will continue apace.
How to invest in healthcare stocks
If you’re thinking of jumping into the biotech industry, bear in mind that it is subject to boom-and-bust cycles that typically last four to five years, and the peaks and troughs can be extreme. You should size your stake appropriately.
The good news is that it’s early days since the last trough. That said, “to be successful as a healthcare investor, you need to have a lot of patience and a long-term view,” says Rais. It can take more than a decade to develop new drugs — though artificial intelligence could cut that timeline in half — and about 90% of therapies under development fail to come to market, according to a Morgan Stanley report.
To help you cash in, we’ve identified six funds that focus on biotech and related businesses. All data and returns are through September 30, unless otherwise noted.
A good way to take baby steps into biotech is through an index-based ETF. You could start with the State Street SPDR S&P Biotech ETF (XBI). The ETF tracks the S&P Biotechnology Select Industry Index and holds 147 biotech stocks in mostly small (75% of the ETF’s assets) and midsize (17% of assets) firms.
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That’s good, because most of the groundbreaking innovation is happening among the smaller biotech firms; they are also primary acquisition targets. XBI’s 12-month return is an eye-popping 58%.
The Virtus Biotech ETF (BBP) tracks an index of 65 equally weighted, mostly small and midsize biotech firms that have at least one drug therapy approved by the FDA.
Moderna, Iovance Biotherapeutics (IOVA) and Omeros (OMER) were top holdings at last report. The ETF has held up better than peers in down markets, and its 10-year annualized return, 12.2%, beats the S&P Biotechnology Select Industry Index by an average of nearly three percentage points per year.
We like actively managed biotech funds, too, because a manager’s know-how can be vital to picking more winners than losers. Rajiv Kaul, manager of the Fidelity Select Biotechnology Portfolio (FBIOX), has been at the helm for nearly 21 years, so he has lived through at least four biotech cycles. Over the past five, 10, 15 and 20 years, the fund has outpaced the S&P Biotechnology Select Industry Index.
More than half of the fund sits in small-company stocks; evenly split doses of midsize and large-cap stocks make up the rest of the portfolio. AbbVie (ABBV), Krystal Biotech (KRYS) and Amgen (AMGN) were top holdings, at last report.
A broader approach to the healthcare sector
Each of the three active health funds that we highlight below emphasize biotech, though they invest in other health industries, too. Their returns are not as robust as that of pure-play biotech funds, but their volatility has been more down to earth.
The T. Rowe Price Health ETF (TMED) only launched in June 2025, but is off to a promising start. The fund has gained 27.9% over the past 12 months. Manager Rais, who has business and medical degrees, runs the fund with nine analysts. Though the portfolio tilts heavily toward biotech (37%) and life science tools (19%), the fund stretches across the sector.
“It’s a very science-due-diligence approach,” says Rais. “Is there a differentiated drug here? That’s the guiding principle.”
Alnylam Pharmaceuticals’ (ALNY) drug for a deadly condition called cardiac TTR, for instance, stops the production of the toxic protein that causes the disease and significantly reduces the risk of death.
“If you can prove that a drug reduces the likelihood that you’re going to die, that’s the most powerful result you can have,” says Rais.
At Eventide Healthcare & Life Sciences (ETNHX), biotech and pharmaceuticals firms make up 79% of assets. Another 9% is devoted to equipment — the tools, implements and machines used to make or develop drugs — and diagnostics; then comes a 6.3% stake in medical tech companies, which make smart devices such as diabetes insulin pumps.
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The fund holds 62 stocks, most with small to midsize market capitalizations. Contributors to the fund’s 34.4% return over the past 12 months include Guardant Health (GH), up 185%, and Revolution Medicines, maker of that pancreatic cancer breakthrough drug (up 340%).
Even before the fundamental research begins at this fund, only firms that pass certain standards for doing good — environmentally and socially, among other things — are considered.
“We embrace companies that we can be proud of that are promoting human flourishing,” says Kuruvilla, who practiced medicine before joining the investment world. Eventide Asset Management allocates 1% of the aggregate assets it manages to socially impactful investments. “It’s the right thing to do,” says Kuruvilla.
Fidelity Select Health Care Portfolio (FSPHX) is a member of the Kiplinger 25, the list of our favorite actively managed, no-load funds. Over the past 12 months, the fund has gained 31.6%. Oruka Therapeutics (ORKA), up 333% over the past 12 months, and Merck, up 77%, are two of the outperformers in the portfolio.
Manager Eddie Yoon invests across the sector in companies of all sizes, blending high-quality firms that have stable earnings with innovative firms that are disrupting the marketplace. More than half of holdings are small or midsize.
Yoon has favored biotech since 2025. “The fundamentals are good, and there’s great clinical data coming out,” he says. He also likes life science tools. “The big AI companies talk about healthcare and drug discovery and bringing technology into that space. You’re going to see that pick up in 2027 and 2028, and that will benefit the tools industry.”
Yoon is “cautiously optimistic” about the turnaround in healthcare. “I don’t want to call a victory too soon because it has been so tough over a long period of time. But I do think the fundamentals are getting better.”
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
