Healthcare is 2018’s top performing sector with a 15 percent return year-to-date, handily beating the broader market’s gain of 4 percent.

But what’s done even better? Medical devices.

There are two medical-device exchange-traded funds: the iShares U.S. Medical Devices ETF (IHI) and SPDR S&P Health Care Equipment ETF (XHE). They’re up 24 percent and 20 percent year-to-date, respectively.

Chris Dhanraj, the head of iShares investment strategy, points to some key factors behind the gains in both the overall healthcare sector and the medical devices subsector.

The first pertains to demographics, which is fueled by aging baby boomers joining Medicare's ranks to the tune of about 10,000 a day. Indeed, Medicare spending is around 20 percent, or roughly $650 billion, of total healthcare spending

Another factor relates to a more-relaxed regulatory environment. Dhanraj notes that the Food and Drug Administration this week proposed new guidelines to overhaul how device makers bring their products to market, known as 510(k) clearance. He says this should streamline the regulatory backdrop and help sustain innovation, although it will likely need congressional approval.

“This is another example of regulatory hurdles being lowered, which in turn should helps sustain the commercialization of new innovations,” he says.

Medical devices cover a variety of products from implants to surgical robots. Dhanraj says the segment has benefitted from last year’s tax overhaul. In addition, technological advances in computational biology, bioinformatics, robotics and artificial intelligence are bringing down development costs.

Not surprisingly, the two medical-device ETFs share some characteristics. Namely, they’re domestic funds with a heavy focus on medical equipment and supplies, and often hold the same companies. To that point, they have 52 overlapping constituents and their portfolios overlap 45 percent by weight, according to ETF Research Center.

IHI is the older and bigger of the two funds. It’s a market-cap weighted product with 58 holdings and $3 billion in assets under management. Its expense ratio is 43 basis points. Nearly half of the fund focuses on firms in the medical equipment, supplies and distribution side of the business. Advanced medical equipment and technology comprise another 40 percent, while pharmaceuticals round out the top three sectors. It tracks the DJ US Select Medical Equipment Index.

Its one-year return of 21.7 percent outpaces the 15 percent one-year return on the Health Care Select Sector SPDR Fund (XLV), a broad-based fund that’s the largest healthcare sector ETF with assets of more than $19 billion. On a 10-year basis, IHI’s average return of 19.5 percent tops the XLV fund’s annualized return of 16 percent during that period.

For context, the SPDR S&P 500 (SPY) is up 6.2 percent on a one-year basis and 14 percent on an annualized 10-year basis.

The top three holdings in IHI are Medtronic at 9.8 percent, Abbott Laboratories at 9.7 percent and Thermo Fisher Scientific at 8.1 percent.

XHE is an equal-weight fund with 61 percent of its portfolio devoted to medical equipment, supplies and distribution; 28 percent invests in advanced medical equipment and technology; and 3 percent in pharmaceuticals. Because of its equal-weighting, the fund’s style leans more toward small- to mid-cap companies, versus the mid- to large-cap tilt of IHI.

XHE tracks the S&P Healthcare Equipment Select Industry Index, has 72 holdings and $681 million in assets under management. The expense ratio is 35 basis points.

XHE’s one-year return is 17 percent. Its average five-year return is 17.7 percent (it doesn't have a 10-year track record). During that period, the annualized return on the broad-based healthcare XLV fund is 13 percent and on SPY it’s 10.8 percent.

Its top three holdings are Hologic at 2 percent, and Varian Medical Systems and Edwards Lifesciences, both at 1.9 percent.

A recent Morgan Stanley research report highlighted the rich valuations of the medical technology sector, noting that large-cap medical device makers trade at a 16 percent premium to the S&P, the highest relative valuation in years.

The report also says continued dollar strength and tariffs could be headwinds for margins and earnings per share. On the flip side, the overall defensive nature of the medical device sector offers some protection against broader healthcare headwinds such as drug pricing and Amazon.com.

Amazon has signaled its intent to play a role in mail order and retail pharmacy, and it moved further in that direction with its purchase of online pharmacy PillPack earlier this year. It could also get into telemedicine via Echo and Alex, and maybe become a medical supplier to hospitals.

Overall, Morgan Stanley is positive on medical technology’s improving fundamentals. But it notes that expectations for the sector are elevated, which sets it up to disappoint.

Financial advisors who want to add this healthcare subsector to client portfolios should think of medical device ETFs as a hybrid—they have the defensive characteristics of healthcare and the growth aspects of technology.

As such, Dhanraj says, they can be considered an “all-weather” play.