Choosing Healthcare ETFs: Why IHE Outperforms IBB for Many Investors

iShares U.S. Pharmaceuticals ETF (NYSEMKT:IHE) offers a more concentrated, lower-cost play on established drugmakers, while iShares Biotechnology ETF (NASDAQ:IBB) provides broader exposure to higher-volatility biotechnology research and development companies.

Both funds target specific segments of the domestic healthcare market, yet they offer distinct exposure to the industry value chain. The iShares U.S. Pharmaceuticals ETF focuses on established drugmakers with recurring revenue, while the iShares Biotechnology ETF tracks a broad index that includes many smaller research-driven firms. This comparison examines how their differing strategies and risk profiles could influence a diversified portfolio.

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.

The iShares U.S. Pharmaceuticals ETF is the more affordable option for investors, sporting a 0.37% expense ratio compared to 0.44% for the iShares Biotechnology ETF. Furthermore, the pharmaceutical fund provides a more meaningful income stream with a 1.4% dividend yield, significantly higher than the 0.2% offered by the biotechnology fund.

Performance & risk comparison

What's inside

The iShares U.S. Pharmaceuticals ETF focuses entirely on the pharmaceuticals sector with 53 holdings. This concentration means it is heavily influenced by the performance of several giant drugmakers, and its largest positions include Eli Lilly (NYSE:LLY) at 25.34%, Johnson & Johnson (NYSE:JNJ) at 22.10%, and Zoetis (NYSE:ZTS) at 4.95%. It was launched in 2006. The iShares U.S. Pharmaceuticals ETF has paid $1.43 per share over the trailing 12 months, which, on its recent ~$102.5 share price, works out to a 1.4% yield.

In contrast, the iShares Biotechnology ETF maintains a much broader portfolio of 243 holdings. It concentrates 88% of its assets in biotechnology, with 9% in life sciences tools and 3% in pharmaceuticals. Its largest positions include Gilead Sciences (NASDAQ:GILD) at 8.57%, Amgen (NASDAQ:AMGN) at 8.21%, and Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.73%. It was launched in 2001. The iShares Biotechnology ETF has paid $0.34 per share over the trailing 12 months, which, on its recent ~$207.7 share price, works out to a 0.2% yield.

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Which looks like the better buy

When comparing the iShares U.S. Pharmaceuticals ETF (IHE) and the iShares Biotechnology ETF (IBB), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. IHE is focused on the pharmaceuticals subsector. It holds about 50 stocks. IBB, on the other hand, is a biotech ETF; it holds around 250 stocks.

Two other important factors are historical performance and income potential. Since 2021, IHE has generated a total return of 79%, equating to a compound annual growth rate (CAGR) of 12.4%. IBB, by contrast, has delivered a total return of 38% with a 6.6% CAGR. IHE has the edge in terms of income potential. It has a dividend yield of 1.4%, while IBB's is only 0.2%.

One final factor to weigh is cost. IHE is more affordable with an expense ratio of 0.44%, while IBB's is 0.37%.

In summary, IHE and IBB are both healthcare ETFs; however, their differences are widespread. Many investors may favor IHE, given its lower expense ratio, better historical returns, and higher dividend yield. Yet some investors seeking exposure to the biotech sector may still consider IBB.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Eli Lilly, Gilead Sciences, Vertex Pharmaceuticals, and Zoetis. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.