Which Healthcare ETF Is the Better Buy: Vanguard's VHT or iShares' IXJ?

Investors often turn to healthcare for a mix of defensive stability and growth potential. Both of these funds target that sector, but they take slightly different approaches. The iShares Global Healthcare ETF (NYSEMKT:IXJ) provides worldwide exposure to healthcare stocks, while the Vanguard Health Care ETF (NYSEMKT:VHT) offers a cheaper, deeper portfolio of mostly U.S. companies.

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.

VHT is the less expensive option, with a rock-bottom 0.09% expense ratio compared to IXJ's 0.38%. VHT also offers a slightly higher dividend yield of 1.55% versus IXJ's 1.44%.

Performance & risk comparison

What's inside

Launched in 2001, IXJ provides exposure to 110 healthcare stocks from across the globe. Its largest positions include Eli Lilly (NYSE:LLY) at 10.3%, Johnson & Johnson (NYSE:JNJ) at 7%, and AbbVie (NYSE:ABBV) at 5%.

VHT maintains a significantly broader list of 417 holdings, primarily concentrated in the U.S. market. Its top holdings are the same three names -- Eli Lilly & Co at 13.4%, Johnson & Johnson at 8.8%, and AbbVie at 6.4% -- though each carries a heavier weighting than they do in IXJ. VHT was launched in 2004.

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Which looks like the better buy

First, let's acknowledge how similar these two funds are at the top. Eli Lilly, Johnson & Johnson, and AbbVie occupy the top three slots in both portfolios. And despite the "Global" in its name, roughly 70% of IXJ's assets sit in U.S.-listed companies. Investors expecting a truly worldwide healthcare fund may find IXJ's foreign holdings thinner than its label suggests.

Sector ETFs like these tend to converge on the same mega-cap names. That's the main reason these two funds look pretty evenly matched across many criteria -- but don't overlook the difference in fees. On a $10,000 position, VHT's 0.09% expense ratio runs about $9 in fees per year versus roughly $38 for IXJ -- a gap that may look trivial in year one but can compound meaningfully over decades.

Another notable differentiating factor is diversification. VHT's 411 holdings reach down into mid- and small-cap biotech and medical device companies, while IXJ's 110 holdings concentrate on the world's largest drugmakers.

For most long-term investors building a healthcare position, VHT's combination of lower cost and broader reach likely makes it the better default strategy. IXJ makes more sense for someone deliberately seeking exposure to non-U.S. names -- with the understanding that you'll have to pay roughly four times as much in fees.

Andy Gould has positions in AbbVie. The Motley Fool has positions in and recommends AbbVie and Eli Lilly. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.