Which Healthcare ETF Is the Better Buy: State Street’s Pharma Fund XPH or iShares’ Biotech Fund IBB?

State Street SPDR S&P Pharmaceuticals ETF (NYSEMKT:XPH) and iShares Biotechnology ETF (NASDAQ:IBB) both offer targeted healthcare exposure, but they differ significantly in sub-sector focus, asset size, and cost structure.

Healthcare investors often choose between biotech and pharmaceutical companies based on risk tolerance and capital growth goals. While State Street SPDR S&P Pharmaceuticals ETF tracks mature pharmaceutical companies, iShares Biotechnology ETF focuses on the more research-intensive biotechnology space. This comparison evaluates how these different mandates affect costs and portfolio construction.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The State Street SPDR S&P Pharmaceuticals ETF is the more affordable option, charging 0.09 percentage points less in annual fees than the iShares Biotechnology ETF. It also provides a higher trailing payout for income-focused investors.

Performance & risk comparison

What's inside

State Street SPDR S&P Pharmaceuticals ETF holds 61 stocks, primarily in the healthcare sector. Its largest positions include Xeris Biopharma Holdings (NASDAQ:XERS) at 4.12%, Veradermics (NYSE:MANE) at 2.99%, and Septerna (NASDAQ:SEPN) at 2.59%. It was launched in 2006. The fund has paid $0.27 per share over the trailing 12 months, which on its recent ~$67.93 share price works out to a 0.4% yield.

iShares Biotechnology ETF manages a much larger portfolio of 243 holdings focused entirely on healthcare. Top holdings include Gilead Sciences (NASDAQ:GILD) at 8.97%, Amgen (NASDAQ:AMGN) at 8.31%, and Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.73%. It was launched in 2001. The fund has paid $0.34 per share over the trailing 12 months, which on its recent ~$217.18 share price works out to a 0.2% yield.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy

I'd go with XPH, because drug industry buyouts are booming, and XPH is built to benefit. Drugmakers like AbbVie, Merck, and Eli Lilly are racing to buy smaller drug developers as patents on their own best-sellers run out, and buyers have paid far above market prices to land the companies they want.

XPH gives smaller developers the same weight as bigger ones, so takeover targets get a real seat at the table. When Merck agreed to buy Terns Pharmaceuticals, a company XPH owned, that stock jumped more than 25% in March. Roughly 60 holdings mean no single deal or trial failure sinks the fund, and it costs less than IBB and pays a higher yield.

IBB is far larger and owns more than 200 companies, led by profitable names like Gilead, Amgen, and Vertex. But XPH puts more of your money in the smaller companies that buyers go after, and its worst drop over the past five years was no deeper than IBB's. For most long-term investors, XPH is the better way to play the deal wave.

Sara Appino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Amgen, Eli Lilly, Gilead Sciences, Merck, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.