Sector ETFs combine diversification and specialization in a way that is appealing to individual investors. These funds track a specific industry, rather than the general market.
But first, let’s back up a second. You may be wondering … what is an ETF?
An ETF is an investment fund. ETFs are traded on public stock exchanges like stocks. But unlike individual stocks, ETFs hold dozens and even hundreds of stocks, commodities or bonds, so you get the safety of diversification. In that way, they’re much like mutual funds.
Because ETFs are “unmanaged,” however—you might say they run on autopilot—ETFs entail lower annual fees than comparable index-based mutual funds, and far lower fees than actively managed mutual funds. And instead of pricing once a day after the market closes, like mutual funds, ETFs are traded throughout the day as if they are regular stocks, so you can buy anytime you want and when you buy, you get exactly the price quoted when you buy.
Now, what is a sector ETF?
Of the more than 1,000 ETFs available, many are designed to mimic the performance of major indexes. You can buy indexes that duplicate the performance of the S&P 500 and the Dow Industrials. You can also buy indexes that mimic lesser-known indexes like the S&P Emerging Markets Small Cap Index and the Dow Jones Small Cap Value Index.
Those are fine for investors who are content to just do as well as the averages.
But if you want to beat the averages, you’ve got to specialize. And for that, the perfect investment vehicles are sector ETFs, which allow you to invest precisely in the economic sectors most likely to bring the biggest gains.
The Global Industry Classification Standard (GICS), organizes companies into 11 sectors, Information Technology, Health Care, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials. Sectors have more than one ETF.
* Basic Materials Select Sector SPDR ETF (XLB): Companies like Monsanto, DuPont and Dow Chemical.
* Consumer Discretionary Select Sector SPDR ETF (XLY): Companies like McDonald’s, Walt Disney and Comcast.
* Consumer Staples Select Sector SPDR ETF (XLP): Companies like Wal-Mart, Proctor & Gamble, Philip Morris and Coca-Cola.
* Energy Select Sector SPDR ETF (XLE): Companies like ExxonMobil, Chevron and ConocoPhillips.
* Financials Select Sector SPDR ETF (XLF): Companies like JPMorgan Chase, Wells Fargo and Bank of America.
* Health Care Select Sector SPDR ETF (XLV): Companies like Pfizer, Johnson & Johnson and Abbott Labs.
* Industrials Select Sector SPDR ETF (XLI): Companies like Boeing, Minnesota Mining & Manufacturing (3M), and United Parcel Service.
* Technology Select Sector SPDR ETF (XLK): Companies like Microsoft, AT&T, IBM and Cisco.
* Utilities Select Sector SPDR ETF (XLU): Companies like Exelon, Southern Co. and Dominion Resources.
Have you invested in a sector ETF? How did it work for you? Leave your comments below.