VHT vs. XBI: Vanguard Health Care ETF Tops SPDR Biotech in Yield and Cost

The Vanguard Health Care ETF (NYSEMKT:VHT) offers broad, low-cost exposure to the full healthcare sector, whereas the State Street SPDR S&P Biotech ETF (NYSEMKT:XBI) provides a targeted, more volatile bet on biotechnology firms.

Both funds serve as primary vehicles for gaining healthcare exposure, yet they employ distinct strategies. Investors may choose between a comprehensive sector-wide approach or a specific sub-industry focus that utilizes a modified equal-weighting methodology to capture the growth potential of smaller biotechnology companies.

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 Vanguard fund is noticeably more affordable with an expense ratio of 0.09%, compared to 0.35% for the SPDR fund. It also offers a higher payout, yielding 1.70% compared to XBI’s 0.30%.

Performance & risk comparison

What's inside

The Vanguard Health Care ETF provides exposure to 411 holdings across the healthcare sector, including providers, equipment manufacturers, and technology companies. Passively managed, it uses a full-replication or sampling strategy to track its benchmark. Its largest positions include Eli Lilly (NYSE:LLY) at 12.12%, Johnson & Johnson (NYSE:JNJ) at 8.81%, and AbbVie (NYSE:ABBV) at 6.03%. Launched in 2004, the fund has paid $4.70 per share over the trailing 12 months. It provides a diversified way to own large-cap leaders in pharmaceuticals and healthcare services.

In contrast, the State Street SPDR S&P Biotech ETF focuses specifically on the biotechnology sub-industry with 151 holdings. It tracks a modified equal-weighted index, providing unconcentrated exposure to large-, mid-, and small-cap stocks. Top holdings include Revolution Medicines (NASDAQ:RVMD) at 1.72%, Travere Therapeutics (NASDAQ:TVTX) at 1.69%, and Tg Therapeutics (NASDAQ:TGTX) at 1.66%. Launched in 2006, the fund has a trailing-12-month dividend of $0.44 per share. By tracking its targeted index, it provides higher exposure to smaller biotechnology firms than its market-cap-weighted peers.

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Which looks like the better buy

The Vanguard Health Care ETF (VHT) and the State Street SPDR S&P Biotech ETF (XBI) offer two exchange-traded fund (ETF) options for investors seeking exposure to the healthcare sector. Here’s how they match up with one another.

First, let’s look at XBI. This fund has over 150 holdings. The fund’s strategy results in a higher concentration of biotech stocks than some other healthcare ETFs. As a result, XBI can demonstrate higher volatility than other ETFs in this category. For example, XBI’s max drawdown over the last five years was -55%, significantly more than VHT’s max drawdown of about -17%. As for performance, XBI has generated a total return of 6% over the last five years, equating to a compound annual growth rate (CAGR) of 1.1% — significantly below the S&P 500’s total return of 92% and CAGR of 13.9%. Finally, XBI has a slightly better-than-average expense ratio of 0.35% and a modest dividend yield of 0.3%.

Then, there’s VHT. This fund is significantly larger than XBI, with over 400 holdings. What’s more, the fund operates a passive strategy. As a result, VHT charges a lower expense ratio of 0.09%. In addition, the fund offers a higher dividend yield of 1.7%, which may appeal to income-seeking investors. As for performance, VHT has generated a total return of 25% over the last five years, with a CAGR of 4.5%. This remains well below the S&P 500’s return over the same period, but it is higher than XBI’s.

In summary, investors seeking broad healthcare exposure will likely favor VHT, as it offers lower fees and a higher dividend yield and has delivered superior returns over the last few years. However, investors seeking exposure to the biotech sub-sector, or more aggressive investors in general, may prefer XBI.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Eli Lilly. The Motley Fool recommends Johnson & Johnson, SPDR Series Trust - SPDR S&P Biotech ETF, and TG Therapeutics. The Motley Fool has a disclosure policy.