Is It Time for Healthcare Stocks to Rebound?

Despite some uncomfortable gyrations, US stocks enjoyed solid gains over the past 12 months. But healthcare stocks missed the party. While the S&P 500 rose 17.6% over the year through September 2025, the health Morningstar Category suffered a 2.9% loss—one of the worst showings of any group.

Several factors account for that woeful result. Healthcare insurers were hit by rising medical costs, changes in government payments, and in the case of UnitedHealth Group UNH, investigations into its billing practices. Pharmaceutical companies were affected by government efforts to rein in prices as well as tariff threats. The sector’s one bright spot— enthusiasm for weight-loss drugs, which had powered a sharp rise in the share price of Eli Lilly LLY, in particular—faded even before Lilly reported disappointing results from a drug trial in August.

Not surprisingly, optimism is lacking. As a result, contrarian investors, always on the lookout for an area everyone else disdains, can find one here. Keep in mind that any sector fund is limited in its purview and thus best kept to a small portion of an investor’s portfolio. For those interested in this currently unloved area, here are three of the best options.

Fidelity Select Health Care FSPHX

This fund is managed by Eddie Yoon, who has vast experience in the healthcare arena. It provides very broad exposure to the sector. The top of the August 2025 portfolio featured three large companies, including Eli Lilly, getting more than 4.9% of assets each. By contrast, the bottom of the portfolio includes about 30 much smaller, more speculative biotech firms limited to tiny positions of 0.1% or less.

The fund entered 2025 with more than 10% of assets in UnitedHealth, which dinged returns as that stock was pummeled. But Yoon has ably guided this fund since 2008 and has a substantial corps of Fidelity healthcare analysts to draw on. Over the trailing 10- and 15-year periods through August 2025, this fund soundly beat the category average.

T. Rowe Price Health Sciences PRHSX

Manager Ziad Bakri recently returned from a four-month sabbatical. He’s been running this fund for nine years, and like Yoon, has a corps of specialist analysts supporting him, though there was some turnover in that group in recent years. This portfolio also combines a handful of large stakes in big companies with a plethora of tiny positions in biotech firms.

Bakri has an affinity for biotech firms, believing that their innovations can supply breakthroughs resulting in handsome payoffs. By contrast, some of the pharmaceutical giants are missing from this portfolio. Bakri thinks biotechs have high upside potential, even though that subsector has underperformed for years, and that his team’s expertise shines brightest in such a technical industry. Overall, his approach has paid off: This offering has trounced the category average over the trailing 10- and 15-year periods.

Vanguard Health Care VGHCX

Unlike the Fidelity and T. Rowe Price options, this huge fund’s manager doesn’t have a lengthy tenure. But that’s not a concern. Rebecca Sykes took over in January 2025 after longtime leader Jean Hynes stepped aside to focus on her role as CEO of Wellington, this fund’s subadvisor. Sykes is well-qualified for the role. She joined Wellington in 2007, began working with Hynes in 2013, and was promoted to comanager two years ago.

One key contrast with the Fidelity and T. Rowe Price offerings: Big Pharma is well represented here. Another difference is geographical. This fund holds a much larger share of its portfolio in firms based outside the US. Its 26% stake in non-US firms (according to Morningstar’s classifications) dwarfs the sub-10% positions in the other two funds. That distinction held back returns as US healthcare stocks outperformed for much of the past decade.

This article first appeared in the September 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.