Healthcare ETF Falls Short on Income

The Health Care Select Sector SPDR Fund (NYSEARCA:XLV) is designed to provide exposure to the S&P 500's healthcare complex at a low expense ratio, but it may not be delivering on its promise for income-focused investors.

One issue with XLV's structure is that it uses a cap-weighted index, which prioritizes market capitalization over dividend yield. This means that high-dividend stocks like AbbVie and Bristol-Myers Squibb are underrepresented in the fund, while lower-yielding stocks like Eli Lilly dominate.

As a result, XLV's blended distribution is below 1.5%, which may not be enough for income-focused investors. In contrast, owning shares of AbbVie directly would provide a yield of roughly 2.65% and an annualized dividend of $6.92.

The same is true for Johnson & Johnson, which pays a quarterly dividend of $1.34, or $5.36 annualized, with a yield near 2%. Bristol Myers Squibb delivers the highest yield in the basket, at 3.75%, more than double XLV's payout.