Sector ETFs Swell in Size as Investors Get Tactical

ETF Trends

Broad market exchange traded funds, such as the SPDR S&P 500 ETF (SPY) and the Vanguard Total Stock Market ETF (VTI) , are good for just that: Broad market exposure.

However, inflows to sector and industry ETFs suggest advisors and investors are increasingly willing to adopt more tactical approaches. Through the first half of this year, sector ETFs raked in $37.7 billion in new assets compared to $13.6 billion for broad U.S. market funds, Jackie Noblett reports for Ignites, citing Morningstar data.

With almost $2.5 billion in 2014 inflows, the Energy Select Sector SPDR (XLE) is the only sector fund among this year’s top-10 asset-gathering ETFs. The Vanguard REIT ETF (VNQ) , an industry fund, has pulled in $3.5 billion, a total surpassed by just two other ETFs. [Where ETF Cash Went in the First Half]

Flows to sector and industry are beneficial to issuers such as Vanguard, iShares, State Street Global Advisors and Fidelity. Those sponsors hauled in $20.4 billion of sector flows in the first half of the year, according to Ignites.

Despite increased competition, State Street remains the dominant issuer of sector ETFs. In the second quarter, three of its sector funds – XLE, the Utilities Select Sector SPDR (XLU) and the Industrial Select Sector SPDR (XLI) were among the top-10 ETFs for new assets. In the current quarter, the Vanguard Global ex-U.S. Real Estate ETF (VNQI) and the Consumer Staples Select Sector SPDR (XLP) are among the top-10 ETFs for new inflows. The two have seen combined inflows of almost $1.2 billion since the start of this month. [Staples Lead Market Rally]

The Technology Select Sector SPDR (XLK) has added $442 million since the start of this month.

Fidelity has also asserted itself as a legitimate player in the sector ETF arena. The mutual fund giant launched 10 sector ETFs backed by MSCI indices last October. Today, the suite has over $1 billion in combined assets under management and five of those ETFs have over $100 million in AUM. [ETFs With MSCI Indices Prove Popular]

Issuers of alternatively-indexed industry and sector ETFs are also benefiting. For example, of the top 35 ETFs issued by PowerShares, the fourth-largest ETF issuer, in terms of 2014 inflows, nine are sector or industry funds, according to issuer data.

That group includes the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) and the PowerShares Dynamic Food & Beverage Portfolio (PBJ) .

First Trust has become one of the fastest-growing U.S. issuers due in part to its AlphaDEX lineup of sector funds. At the end of last year, First Trust was the ninth-largest U.S. ETF issuer with $19.7 billion in AUM. The company is now the sixth-largest sponsor with over $28 billion in AUM.

As just three examples, the First Trust Consumer Staples AlphaDEX Fund (FXG) , First Trust Health Care AlphaDEX Fund (FXH) and the First Trust Energy AlphaDEX Fund (FXN) have combined to add over $1 billion in new assets. [AlphaDEX ETFs Drive First Trust's Growth]

Tom Lydon’s clients own shares of SPY.

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