Sector exchange traded funds give a portfolio exposure to specific industries with one investment.
The most popular ETFs that focus in on sectors are the Sector SPDRs from State Street Global Advisors.
“Initially, many of the first ETFs available to investors tracked extremely broad segments of the market, such as the S&P 500. That was great for those who subscribed fully to the passive investing philosophy, which recommends simply trying to match the market’s performance, rather than beating it,” Dan Caplinger of The Motley Fool wrote. [Energy ETFs: Attractive Valuations and Dividends]
For those investors who wanted to try and outperform the broad market with industries and areas of the market they thought were going to outpace others, sector ETFs became a quick and easy way to gain targeted exposure. This way investors did not have to guess which company would outperform, taking out the guesswork and mitigating the risk factor.
The most important aspect of sector investing is making sure the fund does not overweight to one company or another. Unexpected concentration in one stock or another can cause a portfolio to tank or miss out on possible upticks from other companies not adequately represented.
For example, the Energy Select Sector SPDR (NYSEArca: XLE) weights heavily in two stocks – Exxon Mobile (NYSE: XOM) and Chevron (NYSE: CVX). These oil mega caps have a heavy influence on the sector as a whole, and have pull over the smaller oil companies. [ETF Chart of the Day: Energy Sector]
Energy Select Sector SPDR
Tisha Guerrero contributed to this article.