Healthcare ETF Strategy Reshapes Amid New Policy Framework

The White House unveiled comprehensive healthcare reform on January 15, 2026, introducing “The Great Healthcare Plan,” which fundamentally restructures how prescription drugs are priced, insurance subsidies flow, and healthcare providers operate. This policy transformation—designed to reduce drug costs through Most-Favored-Nation (MFN) pricing mechanisms, redirect insurance subsidies directly to consumers, and mandate industry transparency—has profound implications for healthcare ETF investors. Rather than a fleeting market event, this legislative shift represents a critical moment for portfolio realignment, particularly for those holding healthcare ETF positions that now face shifting regulatory landscapes and profit redistribution across the sector.

Policy-Driven Healthcare Market Segmentation Creates ETF Implications

The reform initiatives target what the administration views as healthcare intermediaries and cost-inflating layers: pharmaceutical benefit managers profiting from opaque pricing, insurers capturing government subsidies meant for patients, and pharmaceutical companies resisting price negotiations. Simultaneously, the plan incentivizes transparency-focused operators, retail health solutions, and pharmaceutical companies willing to embrace pricing agreements. This dual approach—penalizing opacity while rewarding collaboration—reshapes which healthcare sector participants will thrive under the new framework. For healthcare ETF investors, this means understanding which fund holdings benefit from reform versus which face headwinds requires examining the underlying business model changes, not just current profitability.

The policy creates distinct competitive advantages for certain healthcare segments. Retail pharmacy operations expand through accelerated over-the-counter (OTC) medication availability, direct-to-consumer health savings account (HSA) funding from government subsidies, and medical device manufacturers largely insulated from drug pricing and insurance subsidy disputes. Conversely, pharmacy benefit managers orchestrating drug rebates, traditional insurance models dependent on risk pools, and healthcare service providers reliant on subsidy flows face significant business model erosion. This segmentation directly translates to healthcare ETF performance variance across funds with different sector exposures.

Winners Positioned to Capture Healthcare Reform Gains

Retail pharmacy chains like Walmart benefit immediately from policy provisions expanding OTC drug availability, converting prescription medications into retail products that drive store traffic while reducing required medical visits. HealthEquity, positioned as the nation’s leading HSA custodian, becomes a direct beneficiary as government subsidies redirect toward individual health savings accounts rather than flowing through institutional insurers.

Large pharmaceutical manufacturers that have already negotiated or agreed to MFN pricing arrangements—including Merck, Johnson & Johnson, Eli Lilly, AstraZeneca, and Novartis—gain regulatory certainty and favorable positioning. These companies transform from policy targets into reform collaborators, securing advantages including tariff relief and public relations benefits through platforms like TrumpRx, even as overall profit margins face compression from negotiated pricing.

Losers Face Structural Business Model Pressure

Healthcare sectors explicitly targeted by reform face mounting pressure. Pharmacy benefit managers at companies like UnitedHealth Group, Cigna, and CVS Health operate under direct regulatory threat following pledges to eliminate kickback arrangements. These intermediary profit pools, historically shielded from transparent scrutiny, now face legislative restriction.

Traditional managed care insurers including Centene and Molina confront the reform’s most radical element: the redirection of billions in government subsidies from institutional insurers directly to individual consumers. This fundamentally disrupts stable revenue streams and risk pool economics these companies depend upon for predictable earnings.

Healthcare ETF Positioning for the New Regulatory Environment

Against this backdrop, healthcare ETF investors require precision allocation strategies that isolate beneficiary sectors while limiting exposure to pressure-tested business models. Three healthcare ETF positions merit consideration for increased or maintained allocation.

iShares U.S. Pharmaceuticals ETF [IHE], managing $968 million in assets across 55 U.S.-domiciled pharmaceutical and vaccine manufacturers, concentrates exposure to companies navigating MFN negotiations. Top holdings—Johnson & Johnson (22.98%), Eli Lilly (22.69%), and Merck (4.84%)—directly benefit from pricing framework codification and regulatory certainty. The fund charges 38 basis points annually.

State Street Consumer Staples Select Sector SPDR ETF [XLP], with $16.26 billion under management, provides diversified exposure to 36 consumer staples companies, including retail medicine providers. Holdings emphasize companies expanded by OTC medication proliferation: Walmart (11.54%), Costco (9.36%), and Procter & Gamble (7.46%). This healthcare ETF charges just 8 basis points, offering cost-efficient exposure to reform-advantaged retail distribution channels.

iShares U.S. Medical Devices ETF [IHI], managing $4.04 billion across 47 medical device manufacturers and distributors, operates as a defensive positioning within healthcare sector reallocation. Medical device companies remain largely removed from drug pricing disputes and insurance subsidy battles central to reform. Top holdings—Abbott Laboratories (17.13%), Intuitive Surgical (15.35%), and Boston Scientific (10.57%)—offer stable healthcare exposure insulated from reform turbulence. Annual fees stand at 8 basis points.

Healthcare ETF Positions to De-emphasize Under New Conditions

Two healthcare ETF funds warrant reduced allocation pending clarity on competitive dynamics.

iShares U.S. Healthcare Providers ETF [IHF], holding $750.5 million across 62 healthcare provider companies, concentrates exposure to insurance and diagnostic service providers directly affected by reform provisions. Top holdings include UnitedHealth Group (22.2%), CVS Health (12.29%), and Elevance Health (10.26%). The 38 basis point annual fee amplifies exposure to compressed margins.

State Street SPDR S&P Health Care Services ETF [XHS], managing $101.4 million across 59 healthcare service providers, emphasizes managed care insurers facing subsidy redirection: Centene (2.35%), Molina (2.32%), and Alignment Healthcare (2.29%). At 35 basis points annually, this healthcare ETF provides concentrated exposure to business models under legislative pressure.

Calibrating Healthcare ETF Allocations for Market Transition

Investors navigating the post-reform healthcare landscape should systematically evaluate healthcare ETF holdings through the lens of business model durability. Those healthcare ETF positions emphasizing drug manufacturers with pricing framework certainty, retail distribution channels expanding through OTC expansion, and medical devices insulated from cost pressures merit maintained or increased weighting. Conversely, healthcare ETF positions concentrating insurance intermediaries, pharmacy benefit managers, and managed care operators warrant portfolio reassessment pending regulatory implementation clarity and competitive repositioning.