Cellular therapies for liver diseases and in vitro models for drug testing both require functional human hepatocytes (Hum-H), which have unfortunately been limited due to the paucity of donor liver tissues. Human pluripotent stem cells (hPSCs) represent a promising and potentially unlimited cell source to derive Hum-H. However, the hepatic functions of these hPSC-derived cells to date are not fully comparable to adult Hum-H and are more similar to fetal ones. In addition, it has been challenging to obtain functional hepatic engraftment of these cells with prior studies having been done in immunocompromised animals. In this report, we demonstrated successful engraftment of human induced pluripotent stem cell (iPSC)-derived hepatocyte-like cells (iPS-H) in immunocompetent mice by pre-engineering 3D cell co-aggregates with stromal cells (SCs) followed by encapsulation in recently developed biocompatible hydrogel capsules. Notably, upon transplantation, human albumin and α1-antitrypsin (A1AT) in mouse sera secreted by encapsulated iPS-H/SCs aggregates reached a level comparable to the primary Hum-H/SCs control. Further immunohistochemistry of human albumin in retrieved cell aggregates confirmed the survival and function of iPS-H. This proof-of-concept study provides a simple yet robust approach to improve the engraftment of iPS-H, and may be applicable to many stem cell-based therapies.