Which Healthcare ETF Is the Better Buy: VanEck’s Pharma Fund PPH or iShares’ Biotech Fund IBB?

Investors choosing between VanEck Pharmaceutical ETF (NASDAQ:PPH) and iShares Biotechnology ETF (NASDAQ:IBB) are weighing a concentrated, dividend-paying basket of drugmakers against a broader, more volatile portfolio of biotech innovators.

The VanEck Pharmaceutical ETF and iShares Biotechnology ETF both offer targeted exposure to the healthcare industry, yet they represent very different risk-reward profiles. While the pharmaceutical sector often focuses on stable income and mature business models, biotechnology is characterized by speculative research and development that can lead to intense price swings.

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.

Cost-conscious investors may find the VanEck fund more appealing due to its 0.36% expense ratio, which is lower than the 0.44% charged by the iShares fund. Furthermore, the VanEck fund offers a significantly higher payout, carrying a yield gap of 1.64 percentage points over the iShares fund.

Performance & risk comparison

What's inside

VanEck Pharmaceutical ETF is entirely focused on the healthcare sector and maintains a concentrated portfolio of 26 holdings. Its largest positions include Eli Lilly (NYSE:LLY) at 23.24%, Merck & Co (NYSE:MRK) at 12.56%, and Novo Nordisk (NYSE:NVO) at 5.42%. The fund was launched in 2011. VanEck Pharmaceutical ETF has paid $2.14 per share over the trailing 12 months, which on its recent ~$119.21 share price works out to a 1.8% yield.

The iShares Biotechnology ETF provides much broader diversification with 243 holdings, allocated 87% to biotechnology and 10% to life sciences. Its largest positions include Gilead Sciences (NASDAQ:GILD) at 8.94%, Amgen (NASDAQ:AMGN) at 8.31%, and Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.87%. The fund was launched in 2001. iShares Biotechnology ETF has paid $0.34 per share over the trailing 12 months, which on its recent ~$213.79 share price works out to a 0.2% yield.

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Which looks like the better buy

I'd go with PPH, because it owns the drugmakers doing the buying in biotech's deal boom. Eli Lilly, Merck, and Novartis have all been buying smaller developers as patents on their own best-sellers expire, and PPH owns all three, with Lilly as its largest holding. That means you own the buyers rather than betting on which small company gets bought.

PPH holds only about 26 companies, so it is concentrated, but they are large, established drugmakers that pay dividends. It pays a much higher yield than IBB and costs less. Over the past five years its worst drop was also much smaller than IBB's. That steadiness matters in a sector where headlines can move stocks fast.

IBB owns more than 200 companies, including many smaller developers that can jump on good news or buyouts. That can pay off, but those stocks also swing sharply on a single trial result. For most long-term investors, PPH is the steadier way to profit from the deal boom, and it pays you while you wait.

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