Better Healthcare ETF: Fidelity's Broad, Low-Cost FHLC vs. State Street's XBI Targeting Biotech

The Fidelity MSCI Health Care Index ETF (FHLC +0.03%) provides broad, low-cost exposure to the entire healthcare sector, whereas the State Street SPDR S&P Biotech ETF (XBI -0.05%) offers a narrower, more volatile focus on biotechnology.

Both funds target the healthcare space but with different strategies. The Fidelity fund uses a market-cap-weighted approach across the broad industry, while the State Street fund utilizes an equal-weighted index to capture the potential growth of smaller biotechnology companies.

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 Fidelity fund is significantly more affordable with an expense ratio of just 0.08%, compared to 0.35% for the State Street fund. It also offers a higher payout, yielding 1.2% versus 0.3% for its counterpart.

The Fidelity MSCI Health Care Index ETF holds 365 positions across healthcare and technology. Its largest positions include Eli Lilly & Co (LLY -0.61%) at 13.10%, Johnson & Johnson (JNJ -1.02%) at 9.02%, and Abbvie Inc (ABBV +1.11%) at 6.49%. The fund was launched in 2013, and has paid $1.02 per share over the trailing 12 months, which on its recent ~$82.9 share price works out to a 1.2% yield.

The State Street SPDR S&P Biotech ETF contains 165 holdings primarily in healthcare and financial services. Top holdings include Moderna Inc (MRNA +0.57%) at 2.10%, Twist Bioscience Corp (TWST +0.33%) at 2.07%, and Natera Inc (NTRA +0.46%) at 1.80%. The fund was launched in 2006, and has paid $0.54 per share over the trailing 12 months, which on its recent ~$156.6 share price works out to a 0.3% yield.

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The Fidelity MSCI Health Care Index ETF (FHLC) and the State Street SPDR S&P Biotech ETF (XBI) offer different approaches to investing in the healthcare sector. Which to pick depends on whether you want to target biotechnology stocks specifically, or prefer exposure to a variety of healthcare companies, including biotech businesses.

XBI is for investors who are comfortable with the high-risk, high-reward biotech niche. The fund delivered an outstanding one-year return, but a much larger max drawdown in a sign of its volatility. XBI can outperform or fall suddenly because the biotech sector is sensitive to regulatory and clinical wins or setbacks. The ETF's equal-weight strategy reduces single-stock dominance, which can be good if a smaller company achieves a treatment breakthrough, but can hurt performance if the opposite is true.

FHLC is the better ETF for conservative investors. It offers greater stability, a superior dividend yield, and a lower expense ratio. That said, its market-cap-weighted approach means its largest holdings can have an outsized impact on fund performance.