Which Pharmaceuticals ETF Is Better, the iShares IHE or State Street XPH?

The iShares U.S. Pharmaceuticals ETF (NYSEMKT:IHE) offers heavy exposure to pharmaceutical giants and a higher yield, while the State Street SPDR S&P Pharmaceuticals ETF (NYSEMKT:XPH) provides broader, more equal-weighted exposure.

Both funds target the domestic pharmaceutical industry, but they take very different paths to reach that destination. One provides a more equal-weighted view, while the other focuses on the largest market capitalization leaders. This comparison evaluates how these structural differences impact performance, risk profiles, and income potential for investors.

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 fund is slightly more affordable with a 0.35% expense ratio. However, the iShares fund offers a higher 1.5% distribution yield. With $1.3 billion in assets under management, the iShares fund is also considerably larger, suggesting potentially better liquidity for high-volume traders.

Performance & risk comparison

What's inside

The iShares U.S. Pharmaceuticals ETF focuses 100% on the healthcare sector, tracking a benchmark comprised of domestic pharmaceutical equities. With 56 holdings, the portfolio is highly concentrated in industry giants. Its largest positions include Johnson & Johnson (NYSE:JNJ) at 22.36%, Eli Lilly(NYSE:LLY) at 21.71%, and Merck(NYSE:MRK) at 4.31%. This concentration means the performance of the fund is closely tied to a handful of massive firms. It was launched in 2006. The iShares U.S. Pharmaceuticals ETF has paid $1.47 per share over the trailing 12 months, which on its recent ~$100.51 share price works out to a 1.5% yield.

The State Street SPDR S&P Pharmaceuticals ETF also maintains 100% healthcare exposure but spreads its assets across 65 holdings. Unlike its competitor, it tracks the S&P Pharmaceuticals Select Industry Index using a representative sampling technique, resulting in a more balanced distribution across market caps. Its largest positions include Crinetics Pharmaceuticals(NASDAQ:CRNX) at 3.53%, MBX Biosciences(NASDAQ:MBX) at 3.07%, and Definium Therapeutics(NASDAQ:DFTX) at 3.02%. This approach reduces single-stock risk compared to the iShares fund. It was launched in 2006. The State Street SPDR S&P Pharmaceuticals ETF has paid $0.34 per share over the trailing 12 months, which on its recent ~$68.44 share price works out to a 0.5% yield.

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What this means for investors

The iShares U.S. Pharmaceuticals ETF (IHE) and State Street SPDR S&P Pharmaceuticals ETF (XPH) offer a way for investors to gain exposure to the domestic pharmaceuticals industry. Deciding between the two comes down to the factors that matter most to you.

IHE is the better ETF for income-oriented investors given its far higher dividend yield. It’s also ideal if you want to target the largest companies in the pharma sector. Its substantial AUM makes IHE the superior fund for active investors as it provides greater liquidity, which results in tighter bid-ask spreads. However, its market-cap weighted approach means its performance is dependent on a handful of big corporations.

XPH can be a good choice for those who already own shares in pharma giants and want to diversify beyond them into smaller businesses. Its equal-weight strategy ensures performance is not overly affected by a few holdings. That said, because of its exposure to smaller-cap and clinical-stage companies, the fund can be more volatile and lag the performance of IHE, as demonstrated by its higher five-year max drawdown.

Robert Izquierdo has positions in Johnson & Johnson. The Motley Fool has positions in and recommends Eli Lilly and Merck. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.