When 2022 Tore Through the S&P 500, This Healthcare ETF Barely Flinched. Why Isn't It in More Retirement Accounts?

In 2022, investors faced a market environment where traditional 60/40 portfolios provided little protection. The S&P 500 fell about 19% at its low point, while bonds also failed to offer meaningful shelter. Inflation rose well above the Federal Reserve’s long-term target, pushing interest rates sharply higher. As rates increased, both stocks and bonds sold off together, undermining the diversification investors expected. In response, investors sought alternative risk controls, including low-volatility factor ETFs, covered call strategies for income, and buffer ETFs designed to limit downside using options. The piece argues that complex alternatives may not be necessary, and that allocating more to defensive sectors such as health care can help because demand tends to remain more stable across economic cycles. Health Care Select Sector SPDR Fund (XLV) is presented as an example with large assets and a low expense ratio, and it is noted for holding up better than the broader market in 2022.

"A lot of investors were panicking because their supposedly balanced 60/40 portfolios of 60% stocks and 40% bonds were falling almost as much as the stock market itself. At its low point that year, the S&P 500 drew down roughly 19%, and bonds were not providing much shelter either. What happened was that inflation surged far beyond the Federal Reserve's long-term target, forcing interest rates sharply higher. As rates rose, both stocks and bonds sold off together. In other words, the diversification many investors thought they had simply did not work when they needed it most."

"As a result, many investors started looking elsewhere for protection. Low-volatility factor ETFs gained attention. Covered call strategies became extremely popular for their income generation. Buffer ETFs also exploded in popularity because they explicitly tried to limit downside losses with options. Personally, though, I do not think you necessarily need complex alternatives to reduce risk in your portfolio, even in periods where bonds fail to diversify equities properly."

"There is also a case for simply allocating more towards defensive sectors of the economy, sectors where demand tends to remain relatively stable regardless of the economic cycle. One good example is the Health Care Select Sector SPDR Fund (NYSEARCA: XLV). It is one of the largest sector ETFs on the market today with more than $37.5 billion in assets under management, and it remains very affordable with a 0.08% expense ratio."

"Some readers may recognize it as making up 20% of my "cockroach portfolio" alongside allocations to consumer staples, utilities, gold, and Treasury bonds. Today, though, I want to focus on XLV specifically because in 2022, it held up significantly better than the broader market. If you look back historically, that was not the only bear market where healthcare stocks provided meaningful downs"

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