An investment strategy that includes exposure to key sectors is easier with sector exchange traded funds (ETFs), but there are some things you should know before diving in.

Sector ETFs are perfect to get diversification within a portfolio, and are key to following and investing in trends as they present themselves. A sector ETF can help fill out gaps in a portfolio, as well as improve performance and fine-tune exposure, explains Ken Hawkins for Investopedia.

There are several types of sector ETFs to choose from:

  • Market-Weighted. Market-weighted sector ETFs provide excellent exposure to the overall U.S. market. They are essentially biased toward large-cap stocks, and may concentrate on certain stocks rather than spread out. Traditional market-cap weighted selection is utilized. An example of this is the SPDRs (SPY).
  • Equal Weight. In an equal-weight index, each stock has the same impact on the overall performance of the index. Quarterly re-balancing takes place to ensure the equilibrium is achieved. An example of this is the Rydex S&P 500 Equal-Weight Sector ETF (RSP).
  • Fundamental. The weighting of each stock is based upon certain fundamentals of the index’s components. A higher portfolio turnover means the fees are greater with these ETFs.
  • Leveraged. Leveraged ETFs are useful for playing short-term market movements more effectively than regular ETFs. They allow investors to increase exposure to a sector without needing to borrow money. These come with risks of their own and investors should understand them before they buy.

It is important to be familiar with the differences in these types of ETFs to help balance out a portfolio and gain the desired effects.

For more stories about sector ETFs, visit our sector ETF category.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.