Sector ETFs focus on groups of companies that are pursuing the same type of business, like energy, health care, utilities, or technology—just to name a few.
What are sector ETFs?
Sector ETFs (exchange-traded funds) track an index made up of companies offering similar or related products or services within a specific sector of the economy.
Some sector ETFs specialize even further by focusing on a specific industry subgroup within the sector or only including companies that meet particular size requirements.
Why have them in your portfolio?
Investing in a sector ETF allows you to gain exposure to a broad range of companies within this sector, rather than holding a single stock. This can reduce the risk that might be associated with holding a single specific stock.
What are common types of sector ETFs?
Health care ETFs
Track indexes composed of companies engaged in the production and delivery of medicine and health care–related goods and services.
Real estate ETFs
Track indexes composed of companies engaged in the real estate industry and other real estate–related investments.
Track indexes composed of companies involved in the exploration, production, or management of energy resources.
Track indexes composed of companies engaged in the research and development aspects of technology-based goods or services.
Consumer discretionary ETFs
Track indexes composed of companies whose primary line of business is non-essential goods and services, including durable goods, apparel, entertainment and leisure, and automobiles.
Consumer staples ETFs
Track indexes composed of companies whose primary lines of business are food, beverages, tobacco, and other household items.
Track indexes composed of companies engaged in the production and delivery of electric power, natural gas, water, and other utility services.
What are the pros and cons of Sector ETFs?
Sector ETFs have benefits that can be enticing for a portfolio, but there are risks to consider before selecting such an ETF.
Select a specific sector
Sector ETFs allow investors to express a view on a specific sector of the economy that may react beneficially to anticipated events.
An investor with a concentrated position in a single stock may want to avoid duplicating sector exposure with a total market fund. In this case, holding sector ETFs from other sectors may help to round out the portfolio.
Impact of outside influences
When outside influences (culture, government, economy, resources, etc.) experience a shift, that shift can have a negative impact on all of the businesses within the sector. The result is increased volatility.
What are other factors to consider when choosing sector ETFs?
Is the ETF limited to holding only U.S. stocks, or does it provide exposure to companies in the same sector around the world?
Does the ETF restrict holdings based on the size of a company’s market capitalization (e.g., only small-cap or only large-cap)?
Number of holdings
How many companies are classified within the particular sector and held by the ETF? Does the ETF further limit holdings to only a particular industry within the broader sector?
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