PJP vs. IYH: Which Healthcare ETF Is the Better Buy?

The iShares U.S. Healthcare ETF (NYSEMKT:IYH) provides broad exposure to the medical sector at a lower cost, while the Invesco Pharmaceuticals ETF (NYSEMKT:PJP) offers a more concentrated bet on drug development.

While both funds target American companies, their strategies differ significantly -- leading to distinct risk-reward profiles for investors seeking exposure to the healthcare industry.

Snapshot (cost & size)

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

IYH is the cheaper option, with an expense ratio of 0.38% compared to PJP's 0.57%. IYH also offers a modestly higher dividend yield.

Performance & risk comparison

What's inside

Launched in 2000, IYH holds 100 securities, offering wide coverage across pharmaceuticals, medical equipment, and healthcare services. Its top holdings include Eli Lilly (NYSE:LLY) at 16.1%, Johnson & Johnson (NYSE:JNJ) at 10.3%, and AbbVie (NYSE:ABBV) at 7.5%. It was launched in 2000.

PJP is far more concentrated, holding just 29 stocks primarily involved in the research and distribution of drugs. Its largest positions include the same three companies -- AbbVie at 5.6%, Eli Lilly at 5.4%, and Johnson & Johnson at 5.3%. PJP was launched in 2005.

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What this means for investors

The large gap between these two funds' recent returns is a good reminder that investing in healthcare ETFs can involve collections of very different businesses with different risk profiles.

PJP's focus on pharma allowed it to benefit more directly from the industry's recent strength, since drugmakers -- not device companies, insurers, or hospital operators -- were the segment outperforming. That's typical of concentrated sector ETFs: When their niche is in favor, they can meaningfully outpace a broader fund covering the same general industry.

IYH's more diversified approach smooths out some of that volatility. By spreading the fund’s assets across drugmakers, medical device companies, and healthcare service providers, the fund is less exposed to any single market trend -- for better or worse. That diversification, plus its lower expense ratio and higher yield, makes it a more conservative way to stay invested in healthcare without betting heavily on one corner of the industry.

Interestingly, both funds share the same top three holdings -- AbbVie, Johnson & Johnson, and Eli Lilly -- just in different proportions. In PJP, those three names account for about 16% of the portfolio. In IYH, despite holding more than three times as many stocks, the same trio accounts for more than 33% of assets. So while IYH is more diversified by stock count, it's also more top-heavy. The bottom line: Investors in either fund are making a sizable bet on the same handful of pharma giants.

Neither of these funds is inherently superior. Investors chasing recent momentum in pharmaceuticals might lean toward PJP, while those who want steadier, lower-cost exposure to the sector as a whole might prefer IYH. As with most fund decisions, the right choice comes down to how much concentration risk an investor is willing to accept in exchange for the potential of outsize gains.

Andy Gould has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.