Assessing XLV's Long-Term Viability: Structural Flaws and Sector Resilience in the Health Care ETF

The Health Care Select Sector SPDR Fund (XLV), which tracks the S&P Health Care Select Sector Index, has faced a complex interplay of structural challenges and sector-specific dynamics since 2023. As a key player in the health care space, XLV's performance and sustainability hinge on its ability to adapt to evolving market conditions, regulatory pressures, and index composition shifts. This analysis evaluates XLV's structural flaws, recent index changes, and long-term viability, drawing on insights from industry reports and market data.

Index Composition and Structural Adjustments

The S&P Health Care Select Sector Index, maintained by S&P Dow Jones Indices, underwent notable changes between 2023 and 2025. Teleflex (TFX), a medical device manufacturer, was removed from the index on March 24, 2025, as it transitioned to the S&P SmallCap 600, reflecting a shift in its market capitalization profile. Similarly, Celanese (CE) was reclassified into the S&P MidCap 400 during the same period according to S&P Global reports. These adjustments highlight the index's dynamic nature, ensuring alignment with market capitalization thresholds. However, the absence of new additions to the health care sector during this timeframe raises concerns about stagnation in the index's diversification and innovation pipeline.

The index's methodology emphasizes sector neutrality and ESG integration by selecting companies based on ESG scores within industry groups, preserving industry weights relative to the broader S&P 500. While this approach enhances sustainability focus, it does not inherently mitigate regulatory or macroeconomic risks, which remain critical headwinds for the sector.

Performance Trends and Sector Challenges

The health care sector underperformed in 2025, dragged down by policy uncertainties-particularly U.S. drug pricing reforms-and tariff threats impacting pharmaceutical and managed care subsectors. XLV mirrored this trend, experiencing year-to-date outflows despite a late-2025 rebound driven by demographic tailwinds and AI-driven drug development innovations. By October 2025, the sector became the market's best performer, attracting significant inflows as optimism grew around long-term fundamentals.

However, structural flaws persist. The ETF's heavy exposure to large-cap pharmaceuticals and biotech firms leaves it vulnerable to regulatory shifts and profit-margin pressures. For instance, the removal of Teleflex-a mid-cap player-reduced the index's exposure to medical device innovation, a subsector poised for growth. Additionally, liquidity challenges in niche health care subsectors, such as health services, have exacerbated volatility during periods of market stress.

Long-Term Viability and Strategic Considerations

Despite these challenges, XLV's long-term viability is supported by structural tailwinds. Demographic shifts, including an aging population, are expected to drive sustained demand for health care services and technologies. Furthermore, advancements in AI-driven drug discovery and personalized medicine could catalyze sector growth, potentially offsetting regulatory headwinds.

Investors must, however, remain cautious. The lack of new additions to the index since 2023 suggests limited exposure to emerging innovators, which could hinder XLV's ability to capture disruptive trends. Additionally, the ETF's reliance on a concentrated group of large-cap stocks-such as UnitedHealth Group and Johnson & Johnson-exposes it to earnings volatility and sector-specific risks.

Conclusion

The XLV ETF's performance post-2023 reflects a sector grappling with regulatory pressures and structural imbalances but also one with resilient long-term fundamentals. While index adjustments like the removal of Teleflex and Celanese underscore the need for dynamic portfolio management, the absence of new additions highlights a potential gap in innovation exposure. For XLV to remain a viable long-term investment, it must adapt to evolving market demands by incorporating emerging health care technologies and addressing regulatory risks. Investors should monitor policy developments and sector rebalancing efforts, as these will likely shape the ETF's trajectory in the coming years.