Key Takeaways
- Healthcare combines defensive, non-discretionary demand with genuine structural growth, a combination most portfolios underutilize.
- AI-enabled companies are capturing the growth behind FDA-authorized healthcare AI devices, and have received $14.2 billion of digital health funding in 2025.
- Standard sector classifications group healthcare companies with very different business models together, which can obscure where the sector's real innovation and growth are concentrated.
Every portfolio has to answer a question: what do you own that won't move in the same direction as everything else?
For most of the last few years, the honest answer has likely been "not much." Mega-cap technology has carried the market, absorbed flows, and has become the default proxy for growth. Healthcare, one of the market's largest and steadiest sectors, is often not part of this discussion.
That's starting to change.
Why Healthcare Earns a Permanent Seat in a Portfolio
Healthcare is counter-cyclical, meaning its core demand doesn't move with the economic cycle the way discretionary spending does. For instance, people are not likely to defer a cancer treatment or a diabetes prescription because a recession is underway. That inelasticity is why healthcare has historically held up better than the broad market during downturns:
2001 dot-com collapse: the S&P 500 lost roughly half its value while the Health Care Select Sector SPDR Fund (XLV) declined about 0.75% over the same stretch.
2007–2009 financial crisis: the S&P 500 fell roughly 38.5% from peak while XLV declined about 23%, and recovered sooner than the broader market.
But treating healthcare as purely defensive misses half the picture. Janus Henderson's mid-year sector review notes that healthcare's relatively low correlation to technology stocks has become a genuine source of diversification and differentiated returns, not just downside protection. BlackRock's iShares team points out that global investor flows into healthcare hit their highest level in five years in November 2025, after the sector spent most of 2025 out of favor before rallying hard in the fourth quarter.
The sector has quietly been outperforming on fundamentals, too: 89% of healthcare companies in the S&P 500 beat earnings expectations across the four quarters of 2025. However, that strength hasn't been reflected in price. Healthcare currently trades at roughly a 16% valuation discount to the broader market, and the sector's relative price-to-earnings ratio is among the lowest in its history, a gap likely due to a year of policy overhangs, including tariffs, drug-pricing reform, and Medicaid uncertainty, that have started to clear.
Then there's the demand curve that continues to grow. The share of the U.S. population over 65 is projected to reach 20% by 2030, and that cohort spends two to three times more per person on healthcare than younger patients, according to S&P Global Market Intelligence data. Layer on the federal numbers: the Centers for Medicare & Medicaid Services' Office of the Actuary projects national health expenditures will climb from 17.6% of GDP in 2023 to 20.3% by 2033, with healthcare spending outpacing overall economic growth in every year of that projection.
In a nutshell, the population is aging, healthcare is underpriced with strong growth potential, and historically the sector is a good hedge against the market. Thus, not only should healthcare be present in every investor's portfolio, but it should be used strategically and intentionally.
Standard Classification Systems Undersell Healthcare
Healthcare's dual identity of inelastic demand and innovation pipeline can be hard to see due to the structural issues inherent in our investing system. The Global Industry Classification Standard (GICS) — the taxonomy behind most sector ETFs and index funds — groups healthcare companies by business model, not by what actually drives their returns.
As one breakdown of the GICS health care sector points out, a company like Intuitive Surgical, a profitable, established robotics company, sits in the same "Health Care Equipment" bucket as early-stage biotech firms still burning cash on clinical trials. They carry entirely different risk profiles and respond to entirely different catalysts, yet a standard index treats them as interchangeable.
While most investors own healthcare in some capacity either via the S&P500 (12–14% healthcare) or through broad healthcare index funds, there is limited exposure to the now AI-driven growth engine that is diligently working to reduce costs, improve access, and increase workforce capacity. Having precise exposure is what can make a difference within portfolios, but appropriate classification systems to facilitate adequate allocation are lacking.
AI in Healthcare: The Application Layer at Work
Every sector claims an AI story right now. Healthcare is one of the few places where the technology has moved from pilot to production at measurable scale.
The FDA's own device database shows the pace: the agency cleared just a handful of AI-enabled medical devices in 2015. It has since cleared hundreds, bringing the cumulative total to 1,524 authorized AI and machine learning devices, with the majority of clearances given to the field of radiology and diagnostics, which makes sense: pattern recognition across imaging, pathology, and lab data is exactly the kind of narrow, well-defined task where current AI models are most reliable.
Ambient AI and clinical documentation tools that listen to patient-clinician conversations and draft notes automatically were in use at nearly two-thirds of U.S. hospitals running Epic's electronic health record system in 2025.
AI in healthcare is also solving a problem the sector has struggled with for years: workforce capacity. Administrative burden and staffing shortages have been a persistent drag on care delivery, and the AI tools gaining fastest adoption — ambient documentation, triage support, imaging review — are aiming to improve that bottleneck.
Overall, the global AI in healthcare market is projected to grow $187.7 billion by 2030. The AI application layer is already generating revenue, adoption data, and regulatory approvals investors can point to within the industry. That's a meaningfully different investment case than a lot of AI infrastructure spending, where the payoff is still mostly theoretical.
Where a Dedicated HealthTech Fund Fits
Given all of this data, the practical question for a retail investor or advisor isn't whether healthcare belongs in a portfolio. The real question is how to get exposure that actually captures where the sector's growth is concentrated.
A broad healthcare sector fund solves part of the problem. It spreads risk across pharmaceuticals, insurers, medical devices, and providers, which smooths out the volatility of any single subsector. But breadth has a cost: it can dilute exposure to the specific companies building and deploying the AI tools mentioned above. Picking individual stocks solves that concentration problem but reintroduces single-name risk that most retail portfolios may not be able to absorb.
A fund built specifically around healthcare innovation, like Langar's HealthTech fund, is designed to solve this gap. Rather than tracking the healthcare sector broadly or chasing AI broadly, the fund is constructed around the overlap between the two: companies where healthcare and applied AI meet. That's a meaningfully different exposure than either "healthcare" or "AI" as standalone allocations, and it's a distinction that becomes easier to justify as more of the sector's growth concentrates in that overlap specifically.
How much of a portfolio to allocate to these thematic funds is a separate, individual question, one that depends on time horizon, existing sector exposure, and risk tolerance, and is worth working through with a financial advisor rather than answering off a rule of thumb. But directionally, many advisors treat single-theme funds like this as a satellite allocation: a smaller position layered on top of a diversified core, rather than a replacement for one. That framing lets a portfolio benefit from a specific, well-supported thesis without depending on it.
None of this is a case for concentrating a portfolio in any single fund, sector, or theme; good portfolio construction never rests on one allocation doing all the work. If the underlying belief is that healthcare deserves a place in a portfolio, and that AI's clearest near-term value is showing up inside healthcare specifically, a fund built at that intersection is a more direct way to express that view than either piece on its own.
A Sharper Complement, Not a Replacement
The version of this conversation that dominated the last three years assumed exposure to AI meant exposure to a handful of technology companies building the infrastructure underneath it; however, that is not going to be the whole picture with AI. The data on FDA clearances, digital health funding, and healthcare's own valuation reset suggests the application layer, where AI actually touches patients, diagnoses, and drug pipelines, will take center stage as the technology expands.
For retail investors and advisors thinking about where the next several years of portfolio construction should go, the case isn't to abandon technology or chase a new theme. It's to recognize that healthcare already offers the diversification benefits a concentrated market needs, and that a fund purpose-built to capture where healthcare and AI intersect gives investors a more precise way to act on both ideas at once, not as a replacement for a core allocation, but as a sharper complement to one.
For more information on Langar's HealthTech Fund, visit: langarfunds.com.
This article is for informational and educational purposes only and does not constitute investment, legal, or tax advice, or a recommendation to buy or sell any security. Diversification does not ensure a profit or protect against loss. Past performance is not indicative of future results.