When to Use Sector ETF Investing (and What's Inside Matters)

Using ETFs, investors are able to tactically over- and underweight sectors based on changing fundamentals, appealing valuations and shifting seasonality.

A recently released survey conducted by SSGA, the third largest overall ETF provider but a leader in sector focused products, noted that 85% investment professionals are using ETFs to gain exposure to sectors and industries. Expressing a tactical view was cited by approximately two-thirds of the respondents as a reason for incorporating the products into client portfolios.

Defensive sectors, such as consumer staples, telecom and utilities underperformed in August-October this year. But according to CFRA’s chief equity strategist Sam Stovall since 1990 none of those S&P 500 sectors outperformed the broader index between the cyclically strong November-April periods more than half the time. Meanwhile, industrials and materials sectors did so approximately three out of every four times.

Survey respondents told SSGA that the most important variables these investment professionals consider when choosing a specific sector or industry ETF are liquidity, expense ratio and the fund’s holdings.

The industrials sector gathered $403 million of new money in October according to Factset data and we have rankings on 20 different ETFs. This is a sector that could also benefit in 2017 as CFRA equity analyst Jim Corridore expects rising defense budgets and a likely end to sequestration to provide a post-election catalyst for the aerospace and defense sub-industry, which is sizable in popular ETFs.