XLV vs. XLK: Time to Rotate Into Healthcare?

For advisors and investors navigating the back half of 2025, sector positioning is becoming a top priority, and now may be a good time to take a fresh look at the Health Care Select Sector SPDR Fund (XLV).  

Since the post-Liberation Day reversal on April 8, the S&P 500 has soared to record highs, largely on the back of a tech-led rally. The Technology Select Sector SPDR Fund (XLK) has surged more than 40%, while XLV, the largest healthcare ETF, has barely budged, gaining just 1.5%.  

This stark divergence raises an important question: Is now the time to rotate from high-flying tech into underperforming, potentially defensive healthcare?  

Adding to the urgency is President Donald Trump’s recent comment that a 200% tariff on pharmaceuticals could be imposed “very soon,” a threat markets so far seem to view as more bark than bite.  

Still, the healthcare sector remains at a relative discount, especially after leadership shifts at UnitedHealth Group Inc. (UNH) dragged the sector to a two-year low in May.  

Could XLV offer a smart sector rotation opportunity?

XLV vs. XLK: Tech Outperforms But Health Is Defensive

No one can deny the power of momentum and, right now, mega-cap tech is where that momentum lies. Top XLK holdings like Nvidia Corp. (NVDA), which has shot up nearly 70% since April, have driven much of the 2025 market rally, and their heavy representation in the Nasdaq-100 and S&P 500 has pulled those indexes into new high territory.  

But valuations have stretched and, with consumer sentiment softening and core economic data hinting at a slowdown, tech’s leadership could be vulnerable.

On top of that, tariff-induced inflation remains a risk. If higher input costs start cutting into margins or prompting consumer pullbacks, richly valued growth stocks could quickly fall out of favor.  

In contrast, healthcare, long considered a defensive sector, offers insulation from economic cycles. XLV, while lagging in the short term, may become more attractive as investors rebalance in anticipation of volatility.

The Long-Term Case for XLV and Healthcare

Looking past the near-term noise, the case for long-term healthcare exposure remains compelling, making now a potential point to add to positions in this sector. The U.S. population is aging rapidly, and demand for healthcare services, pharmaceuticals and medical technology is steadily rising.  

XLV’s diversified exposure to industry leaders like UNH, Johnson & Johnson (JNJ) and Pfizer Inc. (PFE) provides a mix of stability, dividends and long-term growth potential.

Despite President Trump’s tariff rhetoric, structural tailwinds for the sector remain intact. In fact, if tariff discussions evolve toward negotiated compromises, as they did after the initial post-April 8 turmoil, healthcare stocks could benefit from renewed clarity and restored investor confidence.  

Furthermore, the sector’s consistent profitability and lower volatility characteristics make it a reliable long-term portfolio anchor.

Sector ETFs as Tactical and Strategic Tools

For both short-term portfolio adjustments and long-term allocation, sector ETFs like XLV serve as effective “satellite” holdings around a core diversified strategy. Trimming gains from overheated areas like XLK and reallocating to sectors with lower valuations and defensive appeal can enhance risk-adjusted returns.

In an environment marked by rising macro uncertainty, rotating into healthcare may provide balance and downside protection. While no one can perfectly time sector cycles, using ETF tools to tactically manage sector exposure while keeping diversification at the center of strategy can serve both the prudent investor and the savvy advisor.

Bottom Line

The XLV ETF may not have joined the tech-led surge of 2025, but that underperformance might be its greatest strength. As economic realities set in, now could be a timely opportunity to rotate into healthcare for both tactical positioning and long-term stability.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune held a long position in NVDA.