Healthcare Stocks Are Having a Good Year. Should You Buy a Fidelity or iShares ETF to Profit?

Fidelity MSCI Health Care Index ETF (NYSEMKT:FHLC) offers a significantly lower expense ratio and broader diversification than the iShares U.S. Healthcare ETF (NYSEMKT:IYH), while both hold similar blue-chip positions.

These two exchange-traded funds provide targeted exposure to the U.S. healthcare sector, covering industries from pharmaceutical giants to biotechnology firms. Both the Fidelity and iShares funds maintain significant assets under management (AUM), but their differences in fee structures and portfolio depth may influence which vehicle better suits an investor's goals.

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 30.

The Fidelity fund is notably more affordable for long-term holders, charging just 0.08% annually, compared with the iShares fund’s 0.38% expense ratio. This cost difference represents a primary divergence between these two healthcare-focused investment vehicles.

Performance & risk comparison

What's inside

Fidelity MSCI Health Care Index ETF seeks to track the MSCI USA IMI Health Care Index, which results in a broad portfolio of 334 holdings. It allocates 99% of its weight to healthcare companies with a small portion to financial services. Its largest positions include Eli Lilly & Co (NYSE:LLY) at 14.4%, Johnson & Johnson (NYSE:JNJ) at 9.1%, and Abbvie Inc (NYSE:ABBV) at 6.5%. The fund was launched in 2013. It has paid $1.02 per share over the trailing 12 months, which on its recent ~$79.44 share price works out to a 1.3% yield.

The iShares U.S. Healthcare ETF offers a more concentrated strategy with 100 holdings, primarily mirroring a benchmark of established American healthcare firms. The fund allocates 100% to healthcare. Top positions include Eli Lilly at 16.1%, Johnson & Johnson at 10.3%, and AbbVie at 7.5%. The fund was launched in 2000. It has paid $0.80 per share over the trailing 12 months, which on its recent ~$68.82 share price works out to a 1.2% yield.

Which fund is the better buy?

Both these ETFs offer exposure to the healthcare sector and are alike in many ways.

The similarities: Both funds are almost all (99%-plus) in U.S. stocks, both have identical top 10 holdings roughly weighted about the same, meaning more than half of their portfolios are allocated to their top 10 — 52% for FHLC and 59% for IYH.

Still, they do have some differences investors should take into account when weighing whether to invest.

The Fidelity healthcare ETF, FHLC, is a little more exposed to small-cap stocks, with 11% of its holdings in that classification compared to 6% for the iShares fund, IYH. Both are 23% in mid caps, so that means FHLC is lighter on large cap stocks. About 66% of FHLC’s portfolio is in large-cap equities, mostly value style, while IYH’s large-cap exposure is 71% large caps, also a majority in value stocks.

There aren’t tremendous differences in the funds’ performance, though enough to show one ETF is the better buy than the other. Mainly, the Fidelity vehicle, FHLC, has not only beaten IYH over the past 52 weeks, at about 27% to about 24%, but it also wins out over the 3-year (8.5% to 7.9%), 5-year (5.4% to 4.9%), and 10-year (10.3% vs 9.5%) time frames.

Those differences may not seem like a lot, but if you invested $10,000 in FHLC a decade ago, you would have $26,653 today, about $1,900 more than if you put that money in IYH.

Given the similarities in the funds’ investments, such consistent outperformance shows the benefit of a lower expense ratio over time. As noted earlier, FHLC is much cheaper than IYH, with an expense ratio of 0.08% to 0.38%.

If you’re trying to decide between these two healthcare ETFs, the decision should be clear: go with the Fidelity Healthcare ETF, FHLC.

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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.