Is the VanEck Pharmaceutical ETF or State Street Health Care ETF the Better Buy for Your Portfolio?

The VanEck Pharmaceutical ETF (NASDAQ:PPH) provides concentrated exposure to drugmakers, while the State Street Health Care Select Sector SPDR ETF (NYSEMKT:XLV) offers a broader, lower-cost gateway to the entire healthcare sector.

The healthcare sector remains a foundational component of many diversified portfolios, offering a unique combination of defensive stability and long-term growth potential driven by medical innovation. When navigating this space, investors often weigh the benefits of broad diversification against the potential for targeted returns in specialized niches like pharmaceuticals. This comparison explores the fundamental trade-offs between a diversified industry giant and a more concentrated drugmaker strategy. By examining the differences in cost structures, historical total returns, and underlying portfolio concentrations, investors can better understand which vehicle may be appropriate for their specific financial goals, risk tolerance, and income requirements in a changing market.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield as of the close of trading on July 23.

Operating efficiency is a major differentiator in this match-up, as the State Street Health Care Select Sector SPDR ETF carries an expense ratio that is significantly lower than that of the VanEck Pharmaceutical ETF. While the VanEck fund currently provides a higher payout to its shareholders, the substantial gap in management fees represents a persistent cost advantage for the larger, more diversified health sector fund.

Performance & risk comparison

What's inside

The State Street Health Care Select Sector SPDR ETF tracks the Health Care Select Sector Index, holding 60 positions across medical equipment, healthcare providers, biotechnology, and pharmaceuticals. Its largest positions include Eli Lilly & Co (NYSE:LLY) at 16.5%, Johnson & Johnson (NYSE:JNJ) at 10.6%, and AbbVie (NYSE:ABBV) at 7.7%. It launched in 1998. The portfolio is all invested in healthcare stocks. State Street Health Care Select Sector SPDR ETF has paid $2.53 per share over the trailing 12 months, which on its recent ~$161.44 share price works out to a 1.6% yield.

The VanEck Pharmaceutical ETF tracks the MVIS U.S. Listed Pharmaceutical 25 Index, maintaining a tight portfolio of 25 holdings focused exclusively on pharmaceutical research, production, and sales. Top holdings include Eli Lilly & Co at 20.6%, Novartis (NYSE:NVS) at 10.6%, and Merck & Co (NYSE:MRK) at 9.9%. It launched in 2011. The fund also maintains 100% healthcare exposure. VanEck Pharmaceutical ETF has paid $2.17 per share over the trailing 12 months, which on its recent ~$109.95 share price works out to a 2.0% yield.

Which fund is the better buy?

Both these funds offer access to global pharmaceutical companies at a similar expense ratio. But there are differences to take into account when considering whether to invest in one or the other.

XLV, the State Street offering, and PPH, the VanEck Pharmaceutical ETF, both allocate more than three-quarters of their portfolios to large-cap stocks, at 76% for XLV to 86% for PPH.

While it has a more concentrated portfolio, PPH commits fewer of its assets to U.S. stocks, at 63%, than XLV, which has all of its assets in U.S. equities. The VanEck fund has the U.K. at 11% and Switzerland at 10% as its second- and third-largest country-level allocations.

The main decision, then, comes down to performance. Here both ETFs show themselves admirably. The State Street Health Care ETF, XLV, is the better performer over the 10-year time frame, at 10.1% annualized reutrns, compared to 8.5% for PPH.

But in other time-frames PPH, excels. The VanEck ETF has returned 13.8% and 10.5% annualized returns over the 3-year and 5-year look-backs, respectively. By comparison, XLV returned 7.9% over three years and 6.4% over five years.

Which ETF is the better buy to get exposure to healthcare? Go with PPH, the VanEck Pharmaceutical ETF, due to its superior performance over the past few years.

For more guidance on ETF investing, check out the full guide at this link.

Brendan Coffey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Eli Lilly, and Merck. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.