To get a better handle on market exposure, investors can utilize sector-specific ETFs as a way to overweight specific areas of equities market and better manage investment portfolio exposures.
Dan Dolan, Director of Wealth Management Strategies for Sector SPDRs, at the Charles Schwab Impact Conference argued that there are two main applications to sector-specific ETFs: people use them as a stock substitute and advisors can build model portfolios through sector allocations.
Investors who would usually pick one or two sector stocks can now diversify their position with exposure to hundreds of companies through a single sector ETF. For example, the Technology Select Sector SPDR Fund (NYSEArca: XLK) is a popular way to access the technology segment of the market as it provides exposure to information technology companies found in the S&P 500, such as Apple, Facebook, Google and Microsoft, among others.
Additionally, financial advisors have also begun to utilize sector ETFs to customize portfolios to meet a particular object, such as income, growth or something in between, Dolan said.
For instance, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector ETF, has been a good way to access the steady, dividend-paying utilities players in the S&P 500.
As the markets turn and churn, some areas will inevitably do better than others, and the varying performances will be reflected in the various sector ETF plays.
“When you look at interest rates – the focus of the last couple of years, what happens when rates go higher, when they go lower, the mood swings a little bit,” Dolan said. “So changes within the environment; there is always something different in the sector world.”
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