Which is Best for Investors: Healthcare Stability (XLV) or Biotech Growth (IBBQ)?

The State Street Health Care Select Sector SPDR ETF (NYSEMKT:XLV) provides broad-based exposure to the healthcare sector at lower costs and lower volatility, while the Invesco Nasdaq Biotechnology ETF (NASDAQ:IBBQ) offers focused exposure to the biotechnology subsector with higher historical returns.

Investors seeking healthcare exposure must choose between broad stability and thematic concentration. While both the Invesco fund and the SPDR fund target the healthcare industry, they differ significantly in sub-sector tilts, expense ratios, and historical volatility, making them suitable for different portfolio roles.

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.

From a cost perspective, the SPDR fund is more than twice as efficient as the Invesco fund, which is a significant factor for long-term compounding. This expense advantage, combined with a yield roughly double that of its biotechnology peers, may appeal to income-oriented investors.

Performance & risk comparison

What's inside

State Street Health Care Select Sector SPDR ETF reflects the price and yield performance of the Health Care Select Sector Index, maintaining a 100% tilt toward the healthcare sector. The fund holds 60 stocks, and its largest positions include Eli Lilly & Co (NYSE:LLY) at 16.39%, Johnson & Johnson (NYSE:JNJ) at 10.80%, and AbbVie (NYSE:ABBV) at 7.61%. It was launched in 1998. State Street Health Care Select Sector SPDR ETF has paid $2.53 per share over the trailing 12 months, which, at its recent ~$162.17 share price, yields 1.60%.

Invesco Nasdaq Biotechnology ETF tracks the Nasdaq Biotechnology Index, which is composed of 94% healthcare companies and 6% cash and other assets. It holds 253 stocks, and its largest positions include Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.89%, Amgen (NASDAQ:AMGN) at 7.74%, and Gilead Sciences (NASDAQ:GILD) at 7.16%. It was launched in 2021. Invesco Nasdaq Biotechnology ETF has paid $0.26 per share over the trailing 12 months, which, at its recent ~$33.97 share price, yields 0.80%.

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Which looks like the better buy

The State Street Health Care Select Sector SPDR ETF (XLV) and the Invesco Nasdaq Biotechnology ETF (IBBQ) are both healthcare-focused exchange-traded funds (ETFs). However, they differ in key respects, including fees, holdings, and overall mission. Here’s how they stack up against one another.

First, there’s XLV. This fund is one of the giants in healthcare ETFs. The fund has over $41.7 billion in AUM, making it roughly the 70th-largest ETF by AUM. It also has a long track record, having been founded in 1998. In terms of construction, the fund holds many megacap positions, highlighted by significant exposure to healthcare giants such as Eli Lilly, Johnson & Johnson, AbbVie, UnitedHealth, and Merck. As for performance, the fund has generated a total return of 864% over its lifetime, equating to a compound annual growth rate (CAGR) of 8.6%. That compares favorably to the S&P 500, which has generated a total return of 910% over the same 28-year period, with a CAGR of 8.8%. Finally, XLV offers a very affordable expense ratio of 0.08%, meaning those who invest $10,000 should expect to pay $8 in annual fees.

Then, there’s IBBQ. Unlike XLV, IBBQ is focused on the biotech sector. Biotech stocks are often volatile due to the nature of their business. These companies develop novel treatments for disease, meaning their business prospects are often on a knife’s edge — their stock prices can rise or fall quickly depending on the results of a clinical trial or an approval (or setback) from a government panel. IBBQ is a far newer fund, founded in 2021. During its lifetime, the fund has generated a total return of 35%, equating to a CAGR of 6.2%. That’s far below what the S&P 500 has delivered, with a total return of 91% and a CAGR of 13.6% over the same period. For context, XLV has generated a total return of 41% during this same period, with a CAGR of 6.9%. IBBQ’s 0.19% expense ratio is affordable, but more than twice that of XLV.

In summary, XLV and IBBQ are both healthcare ETFs, but they serve very different purposes. XLV is an excellent choice for investors seeking broad, mostly megacap exposure in the healthcare sector. Its expense ratio is low, making it appealing to cost-conscious investors. IBBQ, meanwhile, is a biotech ETF, designed to diversify risk across the volatile biotech sector. Its expense ratio is solid, although higher than XLV’s. It is the better choice for investors willing to take on greater risk, as it has delivered significantly higher returns over the last 12 months, while XLV has a longer, steadier track record.

Jake Lerch has positions in Merck and Select Sector SPDR Trust - State Street Health Care Select Sector SPDR ETF. The Motley Fool has positions in and recommends AbbVie, Amgen, Eli Lilly, Gilead Sciences, Merck, and Vertex Pharmaceuticals. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool has a disclosure policy.