Harvest's Paul MacDonald sees healthcare's deep valuation discount and long-term fundamentals setting the stage for renewed opportunity
This article was produced in partnership with Harvest ETFs
The year split into two distinct halves for healthcare investors. In the first quarter of 2025, with growth wobbling and defensive factors in favour, healthcare led the market. By late spring, momentum swung to technology as AI excitement and semiconductor strength took command. Political noise around drug pricing and tariffs layered on uncertainty. For a strategy focused on steady businesses and income generation, that shift turned a supportive backdrop into a headwind.
Paul MacDonald, CIO at Harvest Portfolios and lead on Harvest Healthcare Leaders Income ETF (HHL) and its modestly levered sister fund (HHLE), describes the period bluntly. Some pockets worked. Others did not. Earnings beats in the summer often met a flat tape. Misses were punished. A handful of fundamental issues inside managed care weighed on sentiment. Those have largely stabilized. What mattered next were signs that selling pressure was exhausting and that buyers were willing to reward solid results again.
Finding the turn
Healthcare rarely bottoms just because it looks cheap. “Markets do not correct on valuations, and they do not bottom when something is simply inexpensive. You need a catalyst,” says MacDonald. He points to a few tone-shifting moments.
First, Warren Buffett’s late-August buying in UnitedHealth helped break a run of relentless selling across managed care. Second, Pfizer announced a large onshoring plan for manufacturing. The industry had already logged hundreds of billions in similar announcements, but this one sparked a broad bid in big pharma. “The reaction told us sentiment might be changing,” MacDonald says. Third, the market started to buy strong quarters again. Earlier in the year, even a beat with decent guidance often went nowhere. Through the most recent earnings window, “stocks that give a positive outlook are being rewarded,” he adds.
Healthcare stocks may have lost some of their short-term appeal, but periods of underperformance often create opportunities for patient investors. Maintaining a long-term perspective when sectors fall out of favor can be one of the most effective ways to build and compound wealth over time.
Policy risk has not vanished. The difference is that investors look more willing to look past the headlines when guidance and cash generation hold up.
Certain areas within healthcare continue to show growth leadership. The GLP-1 class remains a pillar of growth. “We still love the GLP-1 drugs,” MacDonald says. “Estimates keep going up and we are looking at a market that could reach roughly one hundred and twenty billion dollars over time.” Competition is building, but the incumbents retain an edge in delivery formats and combinations. HHL holds the name he prefers and has avoided others where he sees less favourable risk reward.
More broadly, he views healthcare as a long-duration story anchored by demographics and innovation. “Aging populations, developing markets and technological innovation form our long-term foundation in healthcare,” he says. Politics can obscure that picture for a while. They do not rewrite it.
Income first, with room to participate
HHL is built for income through a disciplined covered-call strategy. “Units outstanding times distribution per unit is my cash flow target for the month,” MacDonald explains. Elevated implied volatility has made option premiums more attractive, allowing the fund to write fewer calls while maintaining its monthly distributions and preserving more upside potential.
He is quick to clarify that covered-call income is not the same as the tax category of return of capital. “Covered calls generate premium income. Return of capital is a tax label under ETF rules. The accounting doesn’t make the cash flow illusory,” he says.
HHLE applies approximately twenty-five percent leverage to HHL’s portfolio and resets daily. “HHLE has straight up exposure of 1.25 times its NAV to HHL,” MacDonald says. “We don’t charge an extra management fee on HHLE, the top fund. In a defensive sector, that level of leverage is modest—it adds some volatility but doesn’t change the core risk-return profile.”
Covered-call investors, he adds, should understand the trade-off: “Nothing for nothing. You give up some upside for the bird-in-the-hand income. For most investors who value consistent cash flow, that’s the trade to consider.”
Positioning for 2026
MacDonald expects growth sectors to remain influential but sees an opportunity for balance as valuations rise in those areas. “Healthcare trades at about a twenty-five-year discount to the market,” he says. “If policy noise fades and earnings execution holds, mean reversion can happen without assuming heroic multiples.”
He favours pairing higher-growth holdings with factors like dividend growth and low volatility; areas that have lagged but offer relative value. Equal weighting within sectors also looks healthier as market breadth improves.
Right now, the sector trades at a forward price-to-earnings ratio of roughly 16, well below the S&P 500’s average of about 22 and far under technology’s near 30. That gap represents the widest valuation discount in thirty years, positioning healthcare as one of the market’s most undervalued sectors relative to its earnings strength.
“The short-term clouds will dissipate,” MacDonald concludes. “The long-term case is intact, and at these relative valuations, healthcare looks better set than it did in midsummer.”
