Biotech ETFs: Which ETF Offers Lower Fees? IBBQ or XPH?

Investors choosing between Invesco Nasdaq Biotechnology ETF (NASDAQ:IBBQ) and State Street SPDR S&P Pharmaceuticals ETF (NYSEMKT:XPH) could weigh the lower costs and broader diversification of IBBQ against the established size and pharmaceutical focus of XPH.

Both funds offer targeted exposure to the healthcare sector, with a focus on research-intensive fields such as biotechnology and pharmaceuticals. While IBBQ tracks the Nasdaq Biotechnology Index, XPH provides modified equal-weighted exposure to the S&P Pharmaceuticals Select Industry Index. This comparison evaluates how these two different indexing strategies impact costs, diversification, and long-term performance.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Invesco fund maintains a clear cost advantage with an expense ratio of 0.19%, which is nearly half the 0.35% fee charged by the SPDR fund. Additionally, IBBQ provides a slightly higher trailing-12-month dividend payout for yield-seeking investors.

Performance & risk comparison

What's inside

State Street SPDR S&P Pharmaceuticals ETF (XPH) provides focused exposure to 58 pharmaceutical companies through a modified equal-weighted approach. Its largest positions include Corcept Therapeutics (NASDAQ:CORT) at 4.00%, Organon (NYSE:OGN) at 3.97%, and Liquidia (NASDAQ:LQDA) at 2.71%. This fund launched in 2006 and has a trailing-12-month dividend of $0.37 per share. It seeks to track the pharmaceutical sub-industry of the S&P Total Market Index, allowing investors to take strategic positions at a more targeted level than traditional broad healthcare sector investing.

In contrast, Invesco Nasdaq Biotechnology ETF (IBBQ) offers a much broader reach with 255 holdings and launched in 2021. Its largest positions include Gilead Sciences (NASDAQ:GILD) at 7.38%, Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.37%, and Amgen (NASDAQ:AMGN) at 7.28%. This fund paid $0.25 per share over the trailing 12 months. While both ETFs are 100% concentrated in the healthcare sector, IBBQ targets the Nasdaq Biotechnology Index, which includes both biotechnology and pharmaceutical firms listed on the Nasdaq Stock Market.

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Which looks like the better buy

The Invesco Nasdaq Biotechnology ETF (IBBQ) and the State Street SPDR S&P Pharmaceuticals ETF (XPH) are both healthcare-focused exchange-traded funds (ETFs). Here is how they compare to one another.

First, IBBQ is a fund that targets the biotech sector. The fund’s 255 holdings provide solid diversification in a notoriously volatile sector. IBBQ has an expense ratio of only 0.19%, which is affordable, and a dividend yield of 0.9%, which is quite modest.

Turning to performance, IBBQ has delivered a total return of 18% over the last five years, equating to a compound annual growth rate (CAGR) of 3.4%. That’s well below what the S&P 500 has done. The benchmark index has generated a total return of 90% over the same period, with a CAGR of 13.8%.

Next, there’s XPH. This fund is more narrowly focused, with fewer than 60 holdings. However, this hasn’t made the fund any more volatile. Indeed, its max drawdown over the last five years is nearly identical to IBBQ at 23.6%. The fund has an expense ratio of 0.35% — nearly double that of its rival. Its dividend yield of 0.7% is meager. As for performance, it has delivered a total return of 13% over the last five years, with a CAGR of 2.6%.

In summary, investors who are seeking exposure to the biotech sector may want to consider these two ETFs. IBBQ has a lower expense ratio, a higher dividend yield, and better performance over the last five years, which may make it the choice for many investors.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Corcept Therapeutics, Gilead Sciences, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.