Exchange traded funds allow investors to capture broad markets. However, investors should be mindful of what ETFs they pile into as layering the investments may inadvertently overweight a portfolio to a market segment.
“When you purchase an ETF, you might end up with more or less than you bargained for due to the variety of factors that comprise the fund,” writes Scott Kubie, chief strategy officer at CLS Investments, for InvestmentNews. “Your portfolio can become overexposed in a manner you didn’t intend because the type of ETFs you purchased brought additional exposures along with them.”
CLS Investments points out that investment portfolios are beginning to tilt toward larger allocations in consumer staples and health care stocks. While these defensive sectors have performed in recent years, there is no guarantee the outperformance will last.
Consequently, investors should monitor their exposure, especially with broad stock ETFs. To start off, many include a core position in the S&P 500, which allocates about 15% in healthcare and a little over 9% in consumer staples – the SPDR S&P 500 ETF (NYSEArca: SPY) includes 15.5% health care and 9.5% consumer staples.
Additionally, ETF investors should monitor their other portfolio holdings to check for potentially overweighting the two sectors. For instance, the two sectors tend to be steady businesses that are more likely to regularly increase dividends. Consequently, dividend growth ETF may hold a larger position in the two sectors. The Vanguard Dividend Appreciation ETF (NYSEArca: VIG), the largest dividend ETF, includes a 15.0% tilt toward health care and a large 24.5% position in consumer staples. [Like Dividend Growth? You’ll Love These ETFs]
Due to the outperformance of the two sectors, momentum strategies that emphasize good performance over the intermediate term have also jumped on the bandwagon. For example, the First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV), the largest momentum-based ETF, holds 26.9% biotech, 20.8% health care and 17.1% consumer staples. [A Relative Strength ETF With, Well, Relative Strength]
Since health care and consumer staples have traditionally acted as more defensive sectors, the two areas also make up large positions in low volatility investment strategies. The iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) includes 20.4% healthcare and 14.2% consumer staples. [ETFs to Play the Market During More Volatile Conditions]