There was a time when sector exchange-traded funds (ETFs) were widely considered the territory of more sophisticated, tactical investors. But now, thanks in large part to the proliferation of industry and sector ETFs, more advisors and investors are using these products.
Yes, sector ETFs still have plenty of applications on a tactical basis. With markets in the midst of another earnings season, short-term traders can tap sector ETFs when a particular group delivers a slew of earnings reports in a condensed time frame, as has been the case with financial services stocks this week.
Additionally, investors can tap sector ETFs for longer-term purposes. Say you want to generate income or lower volatility, sector ETFs tracking consumer staples or utilities stocks could make for ideal additions to your portfolio. Likewise, investors wanting to latch onto growth may want to consider positions in dedicated consumer discretionary or technology sector ETFs.
For investors looking for dedicated sector exposure, here are some industry-specific funds to consider.
Fidelity MSCI Communication Services ETF (FCOM)
Expense ratio: 0.084% per year, or $8.40 on a $10,000 investment.
The communication services sector is a mix of growth stocks, such as Facebook Inc. (NASDAQ:FB) and Alphabet Inc. (NASDAQ:GOOG NASDAQ:GOOGL), and old guard telecommunications stocks. However, sector ETFs such as the Fidelity MSCI Communication Services ETF (NYSEARCA:FCOM) are usually heavily allocated to the group’s growth fare.
For example, Facebook and the two classes of Alphabet stock combine for over 40% of FCOM’s weight. This sector ETF and its rivals are worth considering over the near term for multiple reasons. First, Alphabet and Facebook, for varying reasons, are facing considerable Congressional scrutiny and there are efforts to break these and other tech companies up.
Second, more than 60% of the communication services sector reports earnings this week. For long-term investors, FCOM has utility as well, including the fact that Fidelity’s sector ETF’s are the industry’s cheapest.
Consumer Discretionary Select Sector SPDR (XLY)
Expense ratio: 0.13%
The Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) is the oldest and largest sector ETF dedicated to consumer cyclical stocks and has, over the years, risen to acclaim for being an adequate proxy on shares of Amazon.com (NASDAQ:AMZN). That is an accurate assessment as this sector ETF allocates about 23.5% of its weight to Amazon, more than double its second-largest holding.
All three of the Dow Jones Industrial Average’s consumer discretionary components — Home Depot (NYSE:HD), McDonald’s (NYSE:MCD) and NIKE (NYSE:NKE) — reside in XLY and combine for over 22% of the fund’s weight.
XLY provides exposure to “retail (specialty, multiline, internet and direct marketing); hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; auto components; distributors; leisure products; and diversified consumer services” companies, according to State Street.
Global X MSCI China Consumer Discretionary ETF (CHIQ)
Expense ratio: 0.65%
Let’s stick with consumer cyclical stocks for a moment and let the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ) serve as a reminder that investors do not need to confine their search for the best sector ETFs to domestic offerings. There are plenty of ex-US sector ETFs on the market and one of the better offerings, at least for risk-tolerant investors, is CHIQ.
“Among the most powerful are those areas tied to the rising impact of China’s consumers, who have experienced years of high wage growth, migration into cities, and an expansion of internet connectivity,” said Global X in a recent note. “The government has also made consumption a priority as the economy transitions away from export-led industries.”
Sure, CHIQ can be seen as the XLY of China and, yes, that is a positive trait. Data confirm as much.
“China’s Consumer Discretionary sector is the country’s largest by total market cap, yet it is still just half the size of its US counterpart. This is despite the fact that China’s population is four times larger than the US’s and is experiencing a rapidly growing middle class, suggesting that the sector is still in its early stages of growth,” according to Global X.
Health Care Select Sector SPDR (XLV)
Expense ratio: 0.13%
After ranking as the S&P 500’s best-performing sector in 2018, the healthcare sector is the worst-performing group in the U.S. this year. Still, the Health Care Select Sector SPDR (NYSEARCA:XLV) is up more than 6% year-to-date despite a political environment that, at times, feels increasingly hostile toward healthcare stocks.
Aside from its defensive traits, there are reasons to consider XLV or related sector ETFs, including these funds being home to some big-name stocks that are expected to lead major U.S. equity benchmarks to new highs. Plus, the sector’s 2019 lethargy could be a sign value is emerging in the S&P 500’s second-largest sector weight.
“A closer look shows that the large drugmakers are holding back the health care sector,” reports Investor’s Business Daily. “Of the 10 worst-performing stocks in the sector and the XLV ETF, seven are diversified pharmaceutical firms or biotechs. These stocks tend to suffer during years of heavy political activity. Already, several Democratic candidates have put drug prices at the forefront of their campaigns.”
Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS)
Expense ratio: 0.40%
Most consumer staples funds, and sector ETFs for that matter, are cap-weighted funds, but investors may able to generate higher returns in the right settings by favoring an equal-weight strategy such as the Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSEARCA:RHS). The obvious difference between RHS and a cap-weighted rival is, well, average market value.
The average market capitalization of RHS’s 33 holdings is $63.8 billion, but the figure swells to $150.8 billion for biggest cap-weighted consumer staples ETF. In the cap-weighted Consumer Staples Select Sector Index, the largest holding is Procter & Gamble (NYSE:PG) at nearly 16% of the benchmark’s weight. Conversely, the top holding in RHS commands barely more than 3% of the sector ETF’s roster.
Although RHS leans toward smaller stocks, it is not significantly more volatile than competing cap-weighted funds.
Invesco S&P SmallCap Information Technology ETF (PSCT)
Expense ratio: 0.29%
For years, investors have been regaled with tales of exponential returns offered by small-cap technology stocks. However, stock picking in this arena is difficult, making the Invesco S&P SmallCap Information Technology ETF (NASDAQ:PSCT) an appealing options for those seeking small-cap tech exposure.
PSCT’s 87 holdings have an average market value of $1.83 billion, putting this sector fund at the higher end of small-cap territory. As is to be expected, PSCT is a growth-heavy sector with growth stocks accounting for quadruple the weight assigned to the fund’s value fare.
While PSCT is not excessively valued compared to broader small-cap ETFs, the sector ETF usually is much more volatile than standard small-cap benchmarks, indicating this fund is more appropriate for risk-tolerant investors. That said, PSCT offers compensation for that elevated volatility because it usually outperforms basic small-cap indexes over longer holding periods.
Hoya Capital Housing ETF (HOMZ)
Expense ratio: 0.45%
Real estate is one of the smallest sector weights in the S&P 500, but despite that diminutive status, the group is well-represented in the ETF space. One of the new offerings on that front is the Hoya Capital Housing ETF (NYSEARCA:HOMZ), which focuses on residential real estate and the related equity investment opportunities.
HOMZ follows the Hoya Capital Housing 100 Index, an in-house benchmark designed to provide exposure to various elements of the home-buying process, including home builders, home rental operators, home services and technology firms, and home improvement retailers. The fund, which expects to pay a dividend on a monthly basis, is also levered to the rental theme.
“HOMZ offers exposure to the companies that own more than a million rental units across the United States including apartments, single family rentals, and affordable housing,” according to the issuer.
HOMZ is about four months old and is up nearly 9% since inception.
Todd Shriber does not own any of the aforementioned securities.
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