Health Care ETFs: XLV Delivers Low Fees and Solid Returns

Choosing between the State Street Health Care Select Sector SPDR ETF (NYSEMKT:XLV) and the iShares U.S. Healthcare ETF (NYSEMKT:IYH) often comes down to a preference for lower fees versus broader diversification.

Both funds provide concentrated exposure to the U.S. healthcare market, encompassing pharmaceutical giants and medical technology companies. While they share top holdings like Eli Lilly and Co. (NYSE:LLY), Johnson & Johnson (NYSE:JNJ), and AbbVie Inc. (NYSE:ABBV), differences in cost and market-cap concentration could significantly impact long-term results.

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 State Street Health Care Select Sector SPDR ETF is notably more affordable, with an expense ratio of 0.08% compared to the 0.38% charged by the iShares U.S. Healthcare ETF. For income-focused investors, XLV also offers a higher payout, providing more yield per dollar invested than IYH.

Performance & risk comparison

What's inside

The State Street Health Care Select Sector SPDR ETF (XLV) provides exposure to 60 healthcare companies specifically selected from the S&P 500. Its largest positions include Eli Lilly and Co. at 16.52%, Johnson & Johnson at 10.15%, and AbbVie Inc. at 7.15%. Launched in 1998, it has paid $2.51 per share over the trailing 12 months. Its portfolio is 100% weighted toward the healthcare sector and excludes smaller companies not found in the large-cap benchmark.

The iShares U.S. Healthcare ETF (IYH) holds a larger basket of 102 stocks, which may appeal to those seeking exposure to mid-cap companies alongside large-cap leaders. Its largest positions include Eli Lilly and Co. at 16.17%, Johnson & Johnson at 9.81%, and AbbVie Inc. at 6.94%. Launched in 2000, it has a trailing-12-month dividend of $0.81 per share. Like its counterpart, it maintains 100% exposure to the healthcare sector but offers slightly broader diversification across market capitalizations.

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Which looks like the better buy

The State Street Health Care Select Sector SPDR ETF (XLV) and the iShares U.S. Healthcare ETF (IYH) are both viable choices for those who are seeking exposure to the U.S. healthcare sector. Let’s see how these exchange-traded funds (ETFs) compare to one another.

First, there’s XLV. This fund has a history stretching back nearly 30 years, to 1998, making it one of the first sector-focused ETFs. Over its long history, the fund has performed well. Its 812% return over its lifetime equates to a compound annual growth rate (CAGR) of 8.4%. The benchmark S&P 500, by comparison, has generated a total return of 907% and a CAGR of 8.8% over this same period. In other words, the XLV has slightly underperformed the market over its lifetime — but not by much. In addition, there were long stretches during which XLV outperformed.

At any rate, XLV offers investors wide exposure to the healthcare sector at an affordable price; the fund’s expense ratio is only 0.08%. As for income, the fund has a respectable dividend yield of 1.6%.

Turning to IYH, this fund has a similarly long history, having been started in 2000. Over its lifetime, the fund has generated a total return of 596%, equating to a CAGR of 7.7%. However, the S&P 500 has delivered better returns, with a 728% total return and an 8.5% CAGR over the same period.

As for fees, IYH has higher fees compared to XLV, with an expense ratio of 0.38%. Its dividend yield, meanwhile, is lower at 1.3%.

In summary, many investors, particularly buy-and-hold investors, may favor XLV due to its lower fees, higher dividend yield, and superior historical performance.

Jake Lerch has positions in Select Sector SPDR Trust - State Street Health Care Select Sector SPDR ETF. 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.