As the popularity of the exchange traded funds (ETFs) investment vehicle grows, more investors are taking a shotgun approach to investing by picking out whole sectors of the market for their investment portfolios.
There are around 760 ETFs on the market, with 140 aimed at domestic industries that range from nine broad categories all the way down to narrow niche themes, writes Bob O’Brien for Barron’s. According to State Street Global Advisors, about $30 billion has been invested into S&P categories in 2009 alone, up $2.5 billion in 10 years. (6 ETFs everyone should know).
Sector-based ETFs provide an appealing investment idea that many investors want: maximum returns with lower risk. Many advisors also see that these ETFs have the potential to produce more stable alpha, or outperformance, than a strategy of sifting through stocks in a sector. (Which is better – picking stocks or ETFs?)
Other favorable characteristics of sector ETFs include reduced volatility, diversification across a specific industry and liquidity, especially in shorting a sector when shorting individual stocks in the sector isn’t an option. (How sector ETFs can enhance your portfolio).
Doug Sandler, chief equity officer at Riverfront Investment Group, says sectors where the median of the performance range varies from the mean performance, or “wide-dispersion” areas, offers stock pickers opportunities to add value. When dispersions are wide, the chance of picking an individual winner is low and that’s where ETFs come into better use.