Better Healthcare ETF: Vanguard's VHT vs. State Street's Pharmaceuticals-Focused XPH

Comparing the Vanguard Health Care ETF (NYSEMKT:VHT) and State Street SPDR S&P Pharmaceuticals ETF (NYSEMKT:XPH) involves choosing between broad healthcare sector coverage and a concentrated focus on pharmaceutical industry players.

These two funds represent different ways to play the healthcare market. While the Vanguard fund casts a wide net across insurers, equipment providers, and biotechnology, the State Street fund targets the drug manufacturing industry specifically. Investors often use these vehicles to capture defensive qualities and innovation-driven growth.

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.

The Vanguard fund is the more affordable choice with an expense ratio of 0.09%, while the State Street fund charges 0.35%. Additionally, the Vanguard fund offers a higher payout, yielding 1.5% compared to the pharmaceutical fund's 0.5%.

Performance & risk comparison

What's inside

The Vanguard Health Care ETF provides exposure to 411 holdings, covering healthcare (99%) and technology. It operates under a passive management style and its largest positions include Eli Lilly (NYSE:LLY) at 13.40%, Johnson & Johnson (NYSE:JNJ) at 8.84%, and AbbVie (NYSE:ABBV) at 6.45%. The fund was launched in 2004, and has paid $4.72 per share over the trailing 12 months, which on its recent ~$323.7 share price works out to a 1.5% yield.

The State Street SPDR S&P Pharmaceuticals ETF is a more focused vehicle with 65 holdings entirely within the healthcare sector. It seeks to track the performance of the S&P Pharmaceuticals Select Industry Index, and its top holdings include Amylyx Pharmaceuticals (NASDAQ:AMLX) at 4.19% and MBX Biosciences (NASDAQ:MBX) at 3.05%. The fund was launched in 2006, and has paid $0.34 per share over the trailing 12 months, which on its recent ~$72.3 share price works out to a 0.5% yield.

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Which looks like the better buy

Investors seeking exposure to the healthcare sector have two ways to do so through the Vanguard Health Care ETF (VHT) and State Street SPDR S&P Pharmaceuticals ETF (XPH). Choosing between them depends on which fund is better-suited to your individual investment goals.

XPH's pharmaceuticals focus holds the possibility for outsized gains. This makes it the better fund for growth-oriented investors who prioritize upside potential over other factors, such as dividend income and expense ratio. The fund uses an equal-weight approach, which provides the opportunity for all of its holdings to contribute to the ETF's returns.

However, XPH is more volatile than VHT, as evidenced by its larger max drawdown. Because of its singular focus, the fund is vulnerable to downturns in the pharmaceuticals industry, such as from the impact of regulatory or clinical setbacks.

VHT is for investors who want broad exposure across the healthcare sector, and is a particularly good choice for those who hold over the long term, given the fund's low expense ratio combined with its far higher dividend yield. About 34% of the ETF comprises pharmaceutical companies, so it's well-rounded and highly diversified with more than 400 holdings. That said, VHT is market cap-weighted, meaning its performance depends primarily on its large-cap stocks.

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