Healthcare Sector Trading Strategy: Example and Backtesting Insights

Stocks in the healthcare sector are affected by various factors, but they tend to be recession-defensive because health is essential to life. In this article, we look at a healthcare sector trading strategy.

The healthcare sector might add diversification to your portfolio of trading strategies. The reason is that many of the stocks in this sector is what we can call “recession-proof”. They are, of course, not immune to a recession, but their business model tend to be less elastic to the overall economy. Thus, the sector is often labeled safe haven investing.

What is the S&P Healthcare sector?

The S&P 500 Information Technology sector consists of those companies included in the S&P 500 that are classified as members of the GICS information technology sector — a group that includes different industries like pharmaceuticals, biotech, health insurance companies, hospitals, and health device manufacturers. Now, we also have the cannabis companies, which are rapidly growing, as a part of the health care sector. The popular ones include Canopy Growth Corp. and Aurora Cannabis, with market caps of $23 billion and $12 billion, respectively.

Popular ETFs that track the healthcare sector include the Vanguard Health Care ETF (VHT) and the Health Care Select Sector SPDR Fund (XLV).

What are the 5 biggest stocks in the sector?

These are 5 of the biggest stocks in the healthcare sector:

  • United Health Group (UNH). United Health Care Group is a diversified healthcare company operating in the United States. Its operation is divided into four categories: United Healthcare, Optum Insight, Optum Health, and Optum RX. The company offers healthcare benefit plans for employers both in the public and private sectors. In addition, they are also involved in advisory consulting, software, and outsourcing of contracts to medical facilities. The company has been enjoying steady growth in its stock price in recent weeks, with a market cap of $487.352B as of July 20, 2022.

  • Johnson & Johnson. (JNJ). Johnson & Johnson is a big player in the healthcare sector offering various healthcare products in the US and to other parts of the world. The company has a consumer health segment which provides baby products, skin beauty products, oral products, and allergy products. In addition, they also produce first aid products amongst many other pharmaceuticals product. The stock has a total market cap of $449.206B as of July 2022.

  • Eli Lilly and Company. (LLY). Eli Lilly engages in the development and marketing of human pharmaceuticals worldwide. It produces insulin and other kinds of medicine, including cancer drugs. Some of their products include insulin lispro and the Humulin drug group for diabetes, and Alimta and Cyramza for various kinds of cancer. The stock has been performing quite well since the turn of the year, with a market cap of $305.98B as of July 2022.

  • Pfizer Inc. (PFE). Pfizer is a notable name in the biopharmaceutical world. It develops, manufactures, and sells vaccines and many other medicines around the world. The company engages in contract manufacturing and serves wholesalers, retailers, hospitals, clinics, government agencies, pharmacies, and individual provider offices, as well as disease control and prevention centers. During the COVID-19 pandemic, the company rolled out its oral COVID-19 treatment. As of July 20, 2022, the stock has a total market cap of $285.6B

  • AbbVie Inc. (ABBV). Abbie Inc. is a multinational healthcare company that discovers, develops, manufactures, and distributes pharmaceutical products worldwide. It produces drugs for various ailments, including autoimmune diseases. The company has a research collaboration with Dragonfly Therapeutics, Inc. As of July 20, 2022, ABBV stock has a total market cap of $ 260.984B.

However, by the time you read this article, the 5 biggest holdings might have changed. The stock market is extremely dynamic, although we believe the healthcare sector is one of the most stable because of the big moats that surround many of the companies.

For a better understanding of the dynamics of the stock market, we recommend reading our article called Do Stocks Outperform Treasury Bills? We are pretty sure you’ll be pretty surprised by the results of the research presented in that article.

Healthcare sector trading strategy (XLV strategy)

We show you a seasonal trading strategy. The good thing about healthcare stocks is that they have different properties than the “overall market”.

We have made a rotational strategy that twice a year rotates from S&P 500 and the ETF with the ticker code FSPHX.

Why do we use FSPHX? Mainly because we get data back to 1981 – much longer than any ETF (XLV) on the market. Second, the fund holds a pretty diversified portfolio of healthcare stocks.

This is a sector rotation trading strategy. The equity curve looks like this:

Healthcare sector trading strategy (backtest)
Healthcare sector trading strategy (backtest)

The CAGR is a pretty impressive 13.1% (not including reinvested dividends in the S&P 500). Max drawdown is 51% in 2008.

If we backtest by using the ETF with ticker code SPY (which includes dividends) since 1993 we get this equity chart:

The CAGR is 14.25% and the drawdown is 50% in 2008.

Buy and hold for the S&P 500 (SPY) was 10.3% during the period.

The difference in the compounded result is enormous: from 1993 until June 2021 the rotation strategy ends up with 4.45 million, while buy and hold SPY only ends up with 1.622 million.

Just “small” differences add up over time, although 4% more per year can hardly be called small.

If you want to know the logic and code for the strategy, you can either subscribe to our newsletter or the logic and code for over 120 trading ideas (all in Amibroker code, some in Tradestation).

Other sector trading strategies

We have covered all the different subsectors in the S&P 500:

Healthcare trading strategy – ending remarks

We recommend you backtest a few healthcare trading strategies yourself, for example by using XLV which is a very liquid ETF. The healthcare sector trading strategy we provided in this article is a great example of how you can build simple trading strategies, both for sector rotation or for any other type of strategies.


What is the S&P Healthcare sector, and what companies does it include?

The S&P Healthcare sector consists of companies classified in the GICS information technology sector, including pharmaceuticals, biotech, health insurance, hospitals, health device manufacturers, and even cannabis companies. Notable companies include Canopy Growth Corp., Aurora Cannabis, Vanguard Health Care ETF (VHT), and Health Care Select Sector SPDR Fund (XLV).

Who are the 5 biggest stocks in the healthcare sector, and why are they significant?

The five biggest stocks in the healthcare sector are United Health Group (UNH), Johnson & Johnson (JNJ), Eli Lilly and Company (LLY), Pfizer Inc. (PFE), and AbbVie Inc. (ABBV). These companies are significant due to their diverse operations, market capitalizations, and contributions to healthcare products and services globally.

What is a healthcare sector trading strategy, and how can it add diversification to a portfolio?

A healthcare sector trading strategy involves strategically investing in healthcare stocks. It can add diversification to a portfolio as healthcare stocks are often considered recession-proof. The strategy may involve sector rotation, as demonstrated in the article, to capitalize on the unique properties of healthcare stocks.

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