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Written by Katie Brockman for The Motley Fool
XLV offers a significantly lower expense ratio and a higher dividend yield compared to IBB.
IBB has delivered higher one-year returns but carries substantially higher volatility and a deeper historical drawdown.
XLV provides broad exposure to the S&P 500 healthcare sector, while IBB concentrates exclusively on the biotechnology industry.
Investors seeking healthcare exposure must choose between the stability of diversified pharmaceutical giants and the high-growth potential of specialized biotech firms.
The State Street Health Care Select Sector SPDR ETF (NYSEMKT:XLV) provides broad exposure to the healthcare sector at a lower cost, while the iShares Biotechnology ETF (NASDAQ:IBB) focuses on a more volatile niche.
This comparison analyzes how these different focuses affect cost, yield, and risk-adjusted performance for long-term holders.
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.
XLV is more affordable in terms of fees, featuring an expense ratio of 0.08% versus 0.44%. This means that for every $10,000 invested, investors can expect to pay $8 per year in fees with XLV compared to $44 per year with IBB. Income-focused investors may also prefer the higher dividend yield offered by XLV.
XLV tracks the Health Care Select Sector Index and includes stocks from the healthcare sector within the S&P 500. It holds 61 stocks, and its largest positions include Eli Lilly, Johnson & Johnson, and AbbVie. This fund was launched in 1998 and has paid $2.53 per share in dividends over the trailing 12 months.
IBB, on the other hand, focuses entirely on the U.S. biotechnology industry through 243 holdings. Its largest positions include Gilead Sciences, Vertex Pharmaceuticals, and Amgen. It maintains a 100% allocation to the healthcare sector, specifically targeting companies involved in biological research and development. This fund was launched in 2001 and has paid $0.34 per share in dividends over the trailing 12 months.
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XLV and IBB both offer exposure to the healthcare sector, but their differences in scope and diversification may appeal to different investors.
XLV is the broader of the two in terms of sector exposure. It covers large-cap stocks across the healthcare sector, but it includes only companies listed in the S&P 500. While its portfolio is fairly narrow with only 60 holdings, those stocks are spread across pharmaceuticals, biotechnology, healthcare providers and services, equipment, and life sciences tools and services.
IBB holds more than 200 stocks, but they're all within the biotech subsector. This offers investors deep exposure to this niche area of the market, making it a smart buy for those specifically seeking to fill a gap in their portfolios.
Because IBB has a narrower scope, it's at greater risk of short-term volatility. With a higher beta and deeper max drawdown, this fund has experienced more severe short-term volatility than XLV. However, IBB has significantly outperformed XLV in 12-month total returns.
Choosing between the two will come down to risk tolerance and goals. IBB is the higher-risk, higher-reward option, and it can be a good choice for investors looking for access to the biotech space. XLV holds fewer stocks but offers exposure to a broader swath of the large-cap healthcare sector, which can provide added stability.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Amgen, Eli Lilly, Gilead Sciences, and Vertex Pharmaceuticals. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.