XLV - ETF Overview
A Comprehensive Guide to the Health Care Select Sector SPDR Fund (XLV)
In this series on exchange-traded funds (ETFs), I will examine each of the Select Sector SPDR (Standard & Poor’s Depositary Receipts) Funds. Managed by State Street Global Advisors (SSGA), this family of ETFs allows investors to tailor their exposure to specific segments of the S&P 500 Index. Each fund represents a different sector of the index, as illustrated below, and is designed to track the performance of that sector.
For individuals seeking to learn about analyzing Exchange-Traded Funds (ETFs), I suggest reviewing my earlier post that explains the fundamentals of ETFs and the analysis process.
Analyzing an ETF
An Exchange-Traded Fund (ETF) serves as both an investment product and a collective investment scheme. Let’s break down what this entails:
Health Care Select Sector SPDR Fund (XLV) - Snapshot
Overview
The Health Care Select Sector SPDR Fund (XLV) is an exchange-traded fund (ETF) designed to provide investors with targeted exposure to the U.S. healthcare sector. XLV seeks to track the performance of the Health Care Select Sector Index, a subset of the S&P 500 that includes companies in pharmaceuticals, biotechnology, medical devices, healthcare providers, and healthcare technology. XLV is one of the largest and most popular healthcare ETFs, known for its low cost, liquidity, and defensive characteristics.
Investment Strategy
XLV employs a passive, replication strategy, investing at least 95% of its total assets in the securities that comprise the Health Care Select Sector Index. The fund aims to mirror the price and yield performance of the index by holding a portfolio that closely matches the index’s composition in terms of securities and their weightings. This strategy ensures broad exposure to the healthcare sector, which is considered defensive due to consistent demand for healthcare services regardless of economic conditions.
Top Holdings
XLV’s top holdings include leaders in their respective healthcare subsectors:
The top holdings, which account for a significant portion of the portfolio, are:
Eli Lilly and Co. (LLY): A global pharmaceutical leader focused on developing innovative medicines in areas like diabetes, oncology, immunology, and neuroscience.
UnitedHealth Group Inc. (UNH): The largest U.S. health insurance provider and a diversified healthcare company operating through its UnitedHealthcare (insurance) and Optum (health services, analytics, and pharmacy benefits) segments.
Johnson & Johnson (JNJ): A diversified healthcare giant operating in pharmaceuticals, medical devices, and consumer health.
AbbVie Inc. (ABBV): A pharmaceutical company specializing in immunology, oncology, and neuroscience.
Merck & Co. Inc. (MRK): A global pharmaceutical company focusing on oncology, vaccines, and infectious diseases.
Sector Allocation
XLV is exclusively allocated to the healthcare sector, with its holdings diversified across various subsectors within healthcare. The approximate breakdown, based on the index’s composition, includes:
Pharmaceuticals: includes companies that develop, manufacture, and market prescription and over-the-counter drugs for various medical conditions, such as diabetes, cancer, and cardiovascular diseases.
Health Care Providers & Services: encompasses companies that deliver healthcare services, such as health insurance providers, hospitals, and pharmacy benefit managers.
Biotechnology: companies that focus on developing advanced therapies, often using genetic engineering, biologics, or molecular biology to treat diseases like cancer, rare disorders, and autoimmune conditions.
Health Care Equipment & Supplies: includes manufacturers of medical devices, diagnostic equipment, and surgical supplies, ranging from advanced technologies to consumables.
Life Sciences Tools & Services: comprises companies that provide tools, instruments, and services for medical and scientific research, such as gene sequencing, lab equipment, and contract research organizations (CROs).
Health Care Technology: includes companies developing technology solutions for healthcare, such as electronic health records (EHR), telemedicine platforms, and data analytics tools.
This allocation reflects the diversity within the healthcare sector, balancing growth-oriented biotechnology and stable, dividend-paying pharmaceutical companies.
Risk Level
MEDIUM - subject to market fluctuations, regulatory changes, and geopolitical risks that impact the health care industry. However, the healthcare sector’s defensive nature—driven by consistent demand for medical services and products—makes XLV less volatile than broader market ETFs like those tracking the S&P 500.
Performance
Since its inception on December 16, 1998, XLV has delivered solid long-term performance, reflecting the healthcare sector’s growth and resilience. As of May 2025, the annualized performance is approximately 8% to 9%.
Expense Ratio
XLV is known for its cost efficiency, with a Management Expense Ratio (MER) of 0.08%, making it one of the lowest-cost ETFs in its category.
This means that for every $1,000 invested, the annual cost would be $0.80.
Dividend Yield
XLV has an average dividend yield of 1.5%-2%. Dividends are paid quarterly.
This means that if you invest $1,000 in this ETF, you can expect to receive approximately $15 to $20 in dividends over a year, assuming the yield remains constant.
Similar Alternatives
Below is a detailed analysis of alternatives to XLV, focusing on their key characteristics, organized to align with the comprehensive summary provided for this ETF:
Vanguard Health Care ETF (VHT): Tracks the MSCI US Investable Market Health Care 25/50 Index, providing broad exposure to U.S. healthcare companies, including large-, mid-, and small-cap firms.
iShares Global Healthcare ETF (IXJ): Tracks the S&P Global 1200 Healthcare Sector Index, offering exposure to healthcare companies globally, not just in the U.S.
iShares U.S. Healthcare ETF (IYH): Tracks the Dow Jones U.S. Healthcare Index, providing broad exposure to U.S. healthcare companies across various market caps.
Invesco S&P 500 Equal Weight Health Care ETF (RSPH): Tracks the S&P 500 Equal Weight Health Care Index, providing equal-weighted exposure to healthcare companies in the S&P 500.
This is a comparison of the XLV ETF and similar alternatives, focusing on their Management Expense Ratios (MER), yields, and annualized performances.
Target Investors
The Health Care Select Sector SPDR Fund (XLV) is designed to provide targeted exposure to the U.S. healthcare sector by tracking the Health Care Select Sector Index, a subset of the S&P 500. Its characteristics—low cost, defensive nature, and broad sector exposure—make it appealing to a specific group of investors such as:
Sector-Focused Investors: Those looking to gain precise exposure to the health care industry, including pharmaceuticals, biotechnology, and medical equipment companies.
Defensive Investors: XLV is often favored by investors who want stability during economic downturns. The health care sector tends to be less volatile than cyclical industries because medical services and products remain in demand regardless of economic conditions.
Long-Term Investors: Investors with a buy-and-hold strategy who believe in the continued growth of the health care sector may find XLV attractive due to its historical resilience and consistent performance.
Dividend & Income Investors: XLV offers regular dividend payouts, making it suitable for those seeking passive income while maintaining exposure to a growth-oriented sector.
Institutional Investors and Financial Advisors: Hedge funds, pension funds, and financial advisors may use XLV to diversify portfolios or overweight health care based on market outlook.
Tactical & Strategic Investors: Investors who aim to adjust their portfolio allocation based on market trends may use XLV to increase exposure to health care when the sector is expected to outperform.
Passive Investors: Since XLV follows a passive investment strategy, it is ideal for investors who prefer low-cost, index-based investing rather than actively managing individual health care stocks.
Reasons to Invest in XLV
Defensive Sector Exposure – Healthcare is a defensive sector with consistent demand for pharmaceuticals, medical services, and equipment, regardless of economic conditions. This stability makes XLV a hedge against market volatility during recessions or economic uncertainty.
Strong Historical Performance – The healthcare sector has delivered robust historical returns, fueled by innovation and demographic trends. The sector is poised for growth due to aging populations, rising healthcare spending, and advancements in biotechnology, pharmaceuticals, and medical devices.
Low Expense Ratio – XLV’s MER is among the lowest in the healthcare ETF category, cheaper than alternatives.
Dividend Income – XLV offers a dividend yield of 1.5%-2%, making it attractive for income-focused investors.
Diversified Holdings – XLV includes leading health care companies across pharmaceuticals, biotechnology, and medical equipment, reducing single-stock risk.
Liquidity & Accessibility – XLV is highly liquid, making it easy to buy and sell without significant price fluctuations.
Reasons Not to Invest in XLV
Sector Concentration Risk – XLV is not diversified beyond health care, making it vulnerable to sector-specific downturns. As a non-diversified fund, XLV is 100% allocated to healthcare, exposing it to risks like regulatory changes, drug pricing pressures, or patent expirations.
Regulatory & Political Risks – Health care companies face regulatory scrutiny, including drug pricing policies and government intervention. Policy risks could lead to short-term volatility or underperformance, deterring risk-averse or short-term investors.
Limited Growth Potential – Compared to technology or consumer discretionary ETFs, XLV may have slower growth due to its defensive nature.
Interest Rate Sensitivity – Rising interest rates can negatively impact health care stocks, particularly those with high debt levels.
Market Timing Challenges – Investing in sector-specific ETFs requires accurate timing, as health care may underperform during certain market cycles
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