Healthcare ETF Showdown: Invesco Pharmaceuticals vs iShares U.S. Healthcare

The healthcare sector is often viewed as a defensive sector, encompassing everything from mature dividend-paying giants to speculative biotechnology firms. Choosing between a specialized fund like the Invesco Pharmaceuticals ETF (PJP) and a broad-market equivalent like the iShares U.S. Healthcare ETF (IYH) involves weighing the benefits of concentration against the stability of diversification.

Concentration vs Diversification: A Key Differentiator

The Invesco Pharmaceuticals ETF concentrates specifically on a narrow group of 27 pharmaceutical companies, while the iShares U.S. Healthcare ETF provides broader sector exposure with 100 holdings and a lower expense ratio. This concentration strategy can lead to higher returns in specific market conditions but also increases the risk of losses if the sector performs poorly.

Expense Ratio: A Primary Differentiator

The iShares U.S. Healthcare ETF is more affordable with its 0.37% expense ratio, which is nearly 0.2 percentage points lower than the Invesco fund. This lower expense ratio can lead to higher returns over the long term, making it an attractive option for investors seeking to minimize costs.

Income-Seekers: A Higher Payout for IYH

For income-seekers, the iShares fund also provided a higher payout over the past year. The iShares U.S. Healthcare ETF has paid $0.80 per share over the trailing 12 months, which, on its recent ~$72.63 share price, works out to a 1.1% yield. In contrast, the Invesco Pharmaceuticals ETF has paid $1.06 per share over the trailing 12 months, which on its recent ~$128.79 share price works out to a 0.8% yield.

Portfolio Composition: A More Aggressive PJP

The iShares U.S. Healthcare ETF offers exposure across the broad healthcare landscape, including sectors like medical equipment and biotechnology. Its largest positions include Eli Lilly & Co (LLY) at 14.5%, Johnson & Johnson (JNJ) at 10%, and Abbvie Inc (ABBV) at 7.1%. The portfolio contains 100 holdings, and it was launched in 2000. In contrast, the Invesco Pharmaceuticals ETF is more concentrated, holding 27 stocks with a strict focus on companies involved in drug research and development. Its top holdings include Amgen Inc (AMGN) at 5.7%, Abbott Laboratories (ABT) at 5.7%, and Merck & Co (MRK) at 5.5%. Because it focuses on a much smaller portfolio, it takes larger relative stakes in these individual drugmakers.

Performance Comparison: PJP Outperforms IYH

The Invesco Pharmaceuticals ETF has outperformed the iShares U.S. Healthcare ETF in most time periods. Year-to-date, for instance, PJP is up 16.4% to IYH's 14.5% return. Over the 3-year and 5-year periods, PJP wins out with annualized returns of 19.2% and 10.3%, respectively, compared to 10% and 5.5% for IYH. The iShares fund does have a better 10-year performance, at 10.5% vs. 8.1% annualized return.

What to Watch Next: A More Aggressive PJP

While IYH is appealing for its better 10-year return, PJP's consistent outperformance since and its lighter maximum drawdown suggest PJP is the ETF to add to your portfolio. The Motley Fool Stock Advisor analyst team has identified the 10 best stocks for investors to buy now, and iShares Trust - iShares U.S. Healthcare ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. In conclusion, the Invesco Pharmaceuticals ETF and the iShares U.S. Healthcare ETF offer different approaches to investing in the healthcare sector. While IYH is more affordable and provides a higher payout for income-seekers, PJP's concentration strategy and consistent outperformance make it an attractive option for investors seeking higher returns.