Is iShares Pharma ETF (IHE) or SPDR's Biotech ETF (XBI) the Better Long-Term Buy for Investors?

iShares U.S. Pharmaceuticals ETF (NYSEMKT:IHE) offers a more stable, dividend-focused path into healthcare compared to the high-volatility, equal-weighted growth profile of the State Street SPDR S&P Biotech ETF (NYSEMKT:XBI).

Both funds launched in 2006 and provide targeted exposure to specific healthcare niches. While XBI captures the high-risk, high-reward biotech space with a modified equal-weight index, IHE focuses on established pharmaceutical companies, offering a different balance of income and price stability for long-term investors seeking healthcare exposure without the volatility often associated with early-stage clinical trials.

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 iShares U.S. Pharmaceuticals ETF carries a slightly higher expense ratio at 0.38% compared to 0.35% for the State Street SPDR S&P Biotech ETF. However, for income-seeking investors, the iShares fund offers a notably higher payout, with a 1.27 percentage-point yield gap over the SPDR ETF, reflecting its heavy allocation to profitable, dividend-paying pharmaceutical giants.

Performance & risk comparison

What's inside

The iShares U.S. Pharmaceuticals ETF focuses exclusively on the healthcare sector. It holds 55 positions, and its largest positions include Eli Lilly at 24.03%, Johnson & Johnson at 21.02%, and Royalty Pharma at 4.98%. This fund launched in 2006 and paid $1.49 per share over the trailing 12 months.

The State Street SPDR S&P Biotech ETF also concentrates on the healthcare sector. Its largest positions include TG Therapeutics at 1.99%, Travere Therapeutics at 1.92%, and Alkermes at 1.88%. It holds 151 stocks, which is significantly more than its counterpart. The fund also launched in 2006 and has a trailing-12-month dividend of $0.44 per share.

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Which healthcare ETF is a better buy?

Comparing these two healthcare ETFs is a lesson in individual investor risk tolerance. Both ETFs debuted in 2006 and have delivered exceptional annualized total returns since then: 11.6% for XBI and 10.5% for IHE. However, that extra 1.1 percentage points of alpha from XBI comes at the cost of much higher volatility and a lower dividend yield that doesn’t provide as much year-over-year predictability as IHE. In this sense, choosing between the two ETFs depends on how much volatility an investor can stomach.

Smoother ride? IHE. Maybe more upside, but less comfortable? XBI.

However, if an investor is solely focused on exposure to the biotech niche, XBI is the obvious choice, whereas IHE offers steady-Eddie U.S. pharmas to its shareholders. That said, IHE doesn’t come without risks of its own. It holds about half as many stocks as XBI, making it slightly less diversified, and its two largest holdings -- Eli Lilly and Johnson & Johnson -- account for a mildly terrifying 45% of the ETF’s portfolio. While those two stocks may be among America’s most famous and strongest healthcare companies, that is a rather significant allocation risk, especially for investors who are likely seeking out IHE for its stable nature.

From a personal perspective, I’d rather buy XBI today. Yes, it is more volatile, but biotechnology success stories should only become more common with AI and quantum computing over the long haul, so I’d rather own the young industry over its more mature pharma-focused peer. Furthermore, I really don’t like paying IHE’s expense ratio to basically hold two stocks that will equal nearly half of my ETF's value, when I could just buy them on my own for free — so I appreciate XBI’s diversification in this respect as well.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alkermes Plc and Eli Lilly. The Motley Fool recommends Johnson & Johnson, SPDR Series Trust - SPDR S&P Biotech ETF, and TG Therapeutics. The Motley Fool has a disclosure policy.