Healthcare, the best performing sector year to date, took a hit recently on Johnson & Johnson (JNJ - Free Report) news and a federal judge ruling. The world's biggest maker of health care products Johnson & Johnson had a tumultuous ride last week on reports that its baby powder contained cancer-causing asbestos.

Additionally, a federal judge in Texas ruled that President Barack Obama's signature health law — the Affordable Care Act (ACA) or Obamacare — is unconstitutional. U.S. District Court Judge Reed O'Connor of Texas declared that the key portions of the ACA were inconsistent with the U.S. Constitution. The ruling argued that the health-care law cannot stand on its own since Congress last December repealed the individual mandate, which imposed a tax penalty on consumers who went uninsured.

The ruling has sent the hospital and health insurer stocks into a tailspin. Community Health Systems , Molina Healthcare (MOH), Tenet Healthcare (THC - Free Report) , Centene Corporation (CNC - Free Report) , HCA Healthcare (HCA - Free Report) and UnitedHealth (UNH - Free Report) shed 13.5%, 8.9%, 6.8%, 4.8%, 2.8%, and 2.6% respectively.

ETF Impact

The rough trading also spread into the ETF world. Invesco DWA Healthcare Momentum ETF (PTH - Free Report) , Invesco S&P SmallCap Health Care ETF (PSCH - Free Report) , Virtus LifeSci Biotech Clinical Trials ETF (BBC - Free Report) and SPDR S&P Health Care Services ETF (XHS - Free Report) stole the show, losing at least 3.5% on Dec 17.

PTH

This fund follows the DWA Healthcare Technical Leaders Index and holds a basket of 46 U.S. companies. The product has AUM of $228.6 million and trades in lower volume of 34,000 shares. Expense ratio came in at 0.60%. Healthcare equipment and supplies take the largest share at 35.9% while biotechnology and healthcare providers and services round off the next two with double-digit exposure each.

PSCH

This fund targets the small-cap stocks in the healthcare sector by tracking the S&P SmallCap 600 Capped Health Care Index. Holding 68 securities in its basket, it allocates more than one-fourth of the portfolio to healthcare providers & services, and healthcare equipment & supplies. The product has amassed more than $1 billion in its asset base and trades in a good average daily volume of around 135,000 shares. It charges 29 bps a year from investors.

BBC

This fund follows the LifeSci Biotechnology Clinical Trials Index, which tracks the performance of select clinical trials stage biotechnology companies. It holds 100 securities in its basket and has amassed $36.9 million in its asset base. It charges 79 bps in fees per year and trades in a light volume of around 17,000 shares.

XHS

The fund uses an equal-weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 46 stocks in its basket, healthcare services make up for the top sector with 40.3% share followed by managed care (23.5%), healthcare facilities (22%) and health care distributors (14.2%). The fund has accumulated $125.1 million in its asset base and trades in a lower volume of around 15,000 shares a day. Expense ratio comes in at 0.35%.

What Lies Ahead?

Despite the slide, the outlook for the healthcare sector looks promising driven by new tax legislation, positive regulatory backdrop and encouraging industry trends.

This is especially true as increased M&A activity, an accelerated pace of innovation, promising drug launches, growing importance of biosimilars, cost-cutting efforts, an aging population, expanding insurance coverage, growing middle class, insatiable demand for new drugs and ever-increasing health care spending will continue to fuel the sector.

Additionally, the healthcare sector is known for defensive investment and generally outperforms during periods of low growth and high uncertainty. As such, this nature is expected to drive the stocks higher in the current stock market, which is ruffled by various issues including global growth concerns.

Moreover, the above-mentioned ETFs have a solid Zacks ETF Rank #2 (Buy), suggesting their outperformance in the months ahead.

Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk-tolerant, long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.