Healthcare ETFs: PJP Focuses on Pharmaceuticals, While XBI Zeroes in on Biotech

The Invesco Pharmaceuticals ETF (NYSEMKT:PJP) offers concentrated exposure to established, profitable drugmakers with lower volatility, while the State Street SPDR S&P Biotech ETF (NYSEMKT:XBI) provides broader, higher-beta exposure to earlier-stage biotechnology companies.

Investors choosing between these healthcare funds are essentially weighing the relative stability of established pharmaceutical giants against the high-growth potential of clinical-stage biotechnology. While both target the medical sector, their underlying investment strategies result in vastly different risk-return profiles, fee structures, and portfolio concentrations for long-term holders.

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 Invesco fund has a higher expense ratio than the SPDR ETF, at 0.57% versus 0.35%. This 0.22 percentage point difference may be offset for some investors by the higher 1.00% trailing-12-month distribution yield offered by the pharmaceutical-focused fund.

Performance & risk comparison

What's inside

The Invesco Pharmaceuticals ETF (PJP) focuses exclusively on the healthcare sector with 30 holdings. Its largest positions include Corcept Therapeutics (NASDAQ:CORT) at 5.67%, Eli Lilly & Co (NYSE:LLY) at 5.36%, and AbbVie (NYSE:ABBV) at 4.94%. Launched in 2005, the fund has a trailing-12-month dividend of $1.06 per share. Its selection process evaluates companies based on investment merit criteria such as price and earnings momentum, and quality rather than just market capitalization, and the portfolio is rebalanced quarterly.

In contrast, the State Street SPDR S&P Biotech ETF (XBI) provides a much broader reach with 151 holdings. It also concentrates 100% on healthcare but leans specifically into the more volatile biotechnology sub-industry. Its largest positions include Revolution Medicines (NASDAQ:RVMD) at 1.83%, Twist Bioscience Corp (NASDAQ:TWST) at 1.80%, and Alkermes (NASDAQ:ALKS) at 1.79%. Launched in 2006, it has paid $0.44 per share over the trailing 12 months. Its modified equal-weighted index allows for significant exposure to small-cap companies that may be missing from more concentrated pharmaceutical portfolios.

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Which looks like the better buy

The Invesco Pharmaceuticals ETF (PJP) and the State Street SPDR S&P Biotech ETF (XBI) are both healthcare-focused exchange-traded funds (ETFs). However, they differ in important ways. Here’s how they compare to one another.

First, there’s PJP. This fund is designed to provide exposure to the pharmaceuticals sub-sector. Top holdings include giants like Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), and Merck & Co (NYSE:MRK). Performance-wise, the fund has delivered performance similar, but slightly better than, the broader market. Over the last 21 years, PJP has delivered a total return of 851%, equating to a compound annual growth rate (CAGR) of 11.4%. That just beats out the S&P 500, which has a total return of 827% over the same period, with a CAGR of 11.2%. However, PJP’s expense ratio of 0.57% is slightly higher than that of many ETFs. In addition, its 1.0% dividend yield will not appeal to many income-seeking investors.

Then, there’s XBI. This fund focuses on the biotech sub-sector — a narrow industry full of companies whose chief products are often promising but not fully vetted. The biotech sector is notoriously volatile, as companies’ prospects can rise and fall based on clinical test data and regulatory approvals or denials. Over the last 20 years, the fund has delivered a total return roughly on par with the S&P 500. XBI has advanced by 757%, with a CAGR of 11.2%. Meanwhile, the S&P 500 has generated a total return of 769%, with a CAGR of 11.2%. The fund has an expense ratio of 0.35% and a dividend yield of 0.3%.

In summary, PJP will appeal to investors seeking exposure to proven pharmaceutical companies. However, its higher fees may not appeal to cost-conscious investors. XBI, meanwhile, can serve as an excellent substitute for investors seeking diversified exposure to the volatile biotech sub-sector.

Jake Lerch has positions in Merck and Pfizer. The Motley Fool has positions in and recommends AbbVie, Alkermes Plc, Corcept Therapeutics, Eli Lilly, Merck, Pfizer, and Twist Bioscience. The Motley Fool recommends Johnson & Johnson and SPDR Series Trust - SPDR S&P Biotech ETF. The Motley Fool has a disclosure policy.