Pioglitazone (Pio) is a Food and Drug Administration-approved drug for type-2 diabetes that binds and activates the nuclear receptor peroxisome proliferator-activated receptor γ (PPARγ), yet it remains unclear how in vivo Pio metabolites affect PPARγ structure and function. Here, we present a structure-function comparison of Pio and its most abundant in vivo metabolite, 1-hydroxypioglitazone (PioOH). PioOH displayed a lower binding affinity and reduced potency in co-regulator recruitment assays. X-ray crystallography and molecular docking analysis of PioOH-bound PPARγ ligand-binding domain revealed an altered hydrogen bonding network, including the formation of water-mediated bonds, which could underlie its altered biochemical phenotype. NMR spectroscopy and hydrogen/deuterium exchange mass spectrometry analysis coupled to activity assays revealed that PioOH better stabilizes the PPARγ activation function-2 (AF-2) co-activator binding surface and better enhances co-activator binding, affording slightly better transcriptional efficacy. These results indicating that Pio hydroxylation affects its potency and efficacy as a PPARγ agonist contributes to our understanding of PPARγ-drug metabolite interactions.