PPH vs. IYH: Which Healthcare Fund Is the Better Buy?

Investors looking at the VanEck Pharmaceutical ETF (NASDAQ:PPH) and the iShares U.S. Healthcare ETF (NYSEMKT:IYH) are really deciding between a concentrated bet on drugmakers and broad exposure to the entire domestic medical ecosystem.

Both funds provide exposure to the defensive healthcare sector. But while PPH focuses strictly on pharmaceutical giants, IYH casts a wider net, including medical device manufacturers, service providers, and biotechnology firms.

Snapshot (cost & size)

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

PPH is slightly cheaper, with an expense ratio of 0.36% compared to 0.38% for IYH. PPH also offers a higher dividend yield of 1.97% versus IYH's 1.17%.

Performance & risk comparison

IYH's broader number of holdings has translated into a modestly less volatile ride for shareholders -- with a lower maximum drawdown of 17.9% over the last five years. But despite its higher maximum drawdown, PPH achieved the better five-year return.

What's inside

Launched in 2000, IYH provides exposure to a wide variety of healthcare companies. The fund holds 100 different positions. Its top holdings include Eli Lilly (NYSE:LLY) at 15.1%, Johnson & Johnson (NYSE:JNJ) at 10.2%, and AbbVie (NYSE:ABBV) at 7.3%.

PPH focuses strictly on the pharmaceutical industry and maintains a more concentrated roster of 26 holdings. Its largest positions include Eli Lilly at 19.1%, Novartis (NYSE:NVS) at 10.5%, and Merck (NYSE:MRK) at 9.8%. PPH was launched in 2011.

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Which looks like the better buy

If you're trying to decide between these funds, here's the first question to ask: How much concentration risk are you willing to stomach in exchange for a meaningfully higher dividend?

PPH's 26-stock roster is heavily tilted toward a handful of pharmaceutical giants -- Eli Lilly alone makes up 19% of the fund, and the top three positions account for nearly 40% -- so its performance is tightly linked to the fortunes of a small group of drugmakers. That concentration is responsible for PPH's higher yield, but it also means a single company's stumble -- a failed drug trial or a patent cliff, for example -- can have an outsize impact on returns.

IYH's 100-holding portfolio spreads that risk across device makers, healthcare service providers, and biotech firms in addition to pharma names, which helps explain its modestly lower five-year maximum drawdown. That diversification, however, comes at the cost of a lower yield. Many of the biotech and device companies in IYH's portfolio plow cash back into R&D and growth rather than dividends, and some pay no dividend at all. Blending those names in with the pharma giants pulls IYH's dividend yield down to 1.17%, compared with PPH's more concentrated, dividend-heavy pharma portfolio, which supports its 1.97% yield.

Income-focused investors will likely gravitate toward PPH's payout, while those prioritizing greater sector diversification will probably prefer IYH's broader net. Of course, investors who don't want the added task of managing a separate sector fund can also just lean on a core S&P 500 index fund, which already carries a healthcare weighting of roughly 10% to 11%.

Andy Gould has positions in AbbVie. The Motley Fool has positions in and recommends AbbVie, Eli Lilly, and Merck. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.