XLV vs. IHE: Which Healthcare ETF Is the Better Buy?

The State Street Health Care Select Sector SPDR ETF (NYSEMKT:XLV) provides broad healthcare exposure at a lower cost, while the iShares U.S. Pharmaceuticals ETF (NYSEMKT:IHE) offers a concentrated bet on U.S. drugmakers.

While both funds target health-related companies, they diverge sharply in portfolio construction, cost, and recent performance.

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-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

XLV is the cheaper option, with an expense ratio of 0.08% compared to IHE's 0.38%. XLV also pays a higher dividend yield of roughly 1.60%, versus 1.48% for IHE.

Performance & risk comparison

Launched in 1998, XLV focuses on the broad healthcare sector and holds 60 stocks. Its largest positions include Eli Lilly (NYSE:LLY) at 16.5%, Johnson & Johnson (NYSE:JNJ) at 10.6%, and AbbVie (NYSE:ABBV) at 7.7%.

IHE, by contrast, concentrates exclusively on pharmaceutical companies and holds 56 stocks. Its top holdings include Johnson & Johnson at 22.4%, Eli Lilly at 22.3%, and Merck (NYSE:MRK) at 4.6%. IHE was launched in 2006.

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What this means for investors

The primary difference between these two funds comes down to breadth versus concentration.

XLV spreads its assets across the entire healthcare sector -- pharma, medical devices, insurers, and biotech. IHE, on the other hand, is a more targeted bet on U.S. pharmaceutical companies specifically, which helps explain why its 55% one-year return has outpaced XLV's by a wide margin. When drugmakers are in favor, as they have been recently, a concentrated fund like IHE captures more of that upside. But that same concentration cuts both ways during a pharma-specific downturn -- think patent cliffs, drug-pricing headwinds, or regulatory scrutiny -- when XLV's broader mix of companies would likely hold up better.

It's also worth noting that "diversified" is relative here. XLV holds 60 stocks, but its top three positions -- Eli Lilly, Johnson & Johnson, and AbbVie -- still account for nearly 35% of the fund, meaning a sharp move in any one of those names can meaningfully sway returns. IHE's concentration runs even deeper: with just 56 holdings and a pharma-only focus, its top three positions -- Johnson & Johnson, Eli Lilly, and Merck -- make up nearly 50% of the fund. That's a much bigger bet on a handful of drugmakers, which helps explain both IHE's stronger recent returns and the extra risk investors take on if any of those top holdings stumble due to a failed trial, a patent loss, or a disappointing earnings report.

For long-term investors who want steady healthcare exposure without betting heavily on the drug industry's cycles, XLV's lower fee and broader portfolio make it the more sensible choice. Those with higher conviction in pharma specifically -- and the stomach for more volatility -- may find IHE's concentrated approach worth the extra cost.

Andy Gould has positions in AbbVie. 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.