Better Health Care ETF: Fidelity's FHLC vs. State Street's XLV

Investors choosing between the Fidelity MSCI Health Care Index ETF (NYSEMKT:FHLC) and State Street Health Care Select Sector SPDR ETF (NYSEMKT:XLV) may find that the former provides broader market-cap exposure while the latter offers superior liquidity and a higher trailing-12-month dividend yield.

Both funds target the domestic healthcare sector, providing exposure to pharmaceuticals, biotechnology, and equipment providers. While FHLC covers a wider range of company sizes including mid- and small-cap stocks, XLV focuses strictly on the healthcare components of the S&P 500.

This choice between broad-market diversification and blue-chip concentration is a central consideration for investors looking to gain targeted sector exposure.

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.

Both funds are highly cost-efficient with matched 0.08% expense ratios. However, the State Street fund offers a slightly higher payout for income seekers, with a trailing-12-month dividend yield of 1.7% compared to 1.4% for the Fidelity fund. This difference in yield may appeal to those prioritizing current income over slightly higher recent growth.

Performance & risk comparison

What's inside

The State Street Health Care Select Sector SPDR ETF provides concentrated exposure to 60 large-cap healthcare stocks. Its largest positions include Eli Lilly & Co (NYSE:LLY) at 15.18%, Johnson & Johnson (NYSE:JNJ) at 10.42%, and AbbVie (NYSE:ABBV) at 7.09%. Launched in 1998, it provides 100% allocation to the healthcare sector and has paid $2.51 per share over the trailing 12 months. This fund focuses exclusively on established, high-liquidity companies found within the benchmark S&P 500 Index.

The Fidelity MSCI Health Care Index ETF employs a much broader strategy with 365 holdings. Its top positions include Eli Lilly & Co at 13.16%, Johnson & Johnson at 8.90%, and AbbVie at 6.06%. Launched in 2013, the fund has a trailing-12-month dividend of $1.01 per share. By tracking the MSCI USA IMI Health Care Index, it captures small- and mid-cap companies that its competitor skips, though it remains entirely invested in healthcare sector equities.

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What this means for investors

For investors seeking stocks in the healthcare industry, the State Street Health Care Select Sector SPDR ETF (XLV) and Fidelity MSCI Health Care Index ETF (FHLC) offer an efficient way to gain that exposure. This pair of funds take very different approaches, so deciding which to invest in depends on which strategy better fits your goals.

XLV focuses its holdings on healthcare companies within the S&P 500. That’s why it sports only 60 holdings, although its much higher AUM can appeal to active traders. However, over 25% of the ETF is concentrated solely on Eli Lilly and Johnson & Johnson. Consequently, the fund’s performance is highly reliant on these businesses.

XLV’s higher dividend yield and focus on blue-chip companies can appeal to more conservative investors, and those who want to buy and hold for the long term.

FHLC offers a far more diversified fund with over 300 holdings, including mid and small-cap stocks that aren’t available in XLV. This diversification reduces reliance on a few companies, and opens up the potential for greater gains, since smaller companies tend to grow faster than their large cap brethren, as demonstrated in FHLC’s larger one-year return.

That said, smaller businesses tend to deliver more volatile performance, which contributed to FHLC’s higher beta and max drawdown. FHLC is for investors who want broad exposure to the healthcare sector, and are comfortable with more risk and volatility as the trade off for the potential of higher returns.

Robert Izquierdo has positions in Johnson & Johnson. 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.