The equities market is a dynamic ecosystem with various segments moving to their own tune. Since various sectors may shine or dull in varying conditions, investors may consider ex-sector exchange traded funds to limit exposure to areas of weakness and focus on areas of strength.
For instance, healthcare and financials are two of the worst performing sectors in the S&P 500 of 2016, with the S&P 500 Health Care Index down 1.1% and S&P 500 Financials Index down 0.6% year-to-date, compared to the S&P 500’s 5.6% gain.
Alternatively, investors could have utilized the S&P 500 Ex-Health Care ETF (SPXV) and S&P 500 Ex-Financial ETF (SPXN) to remove their exposure to the underperforming sectors and participate in the broad stock market moves. By excluding the underperforming sectors, SPXV increased 7.2% and SXPN rose 3.5% year-to-date.
Like their names imply, SPXV excludes health care exposure and SPXN excludes financial companies. However, potential investors should be aware that since the funds purposely exclude exposure to some of the largest S&P 500 market sectors, the ETFs portfolios allocations will overweight other large market segments in their place.
Trending on ETF Trends
The S&P 500’s top sector weights include tech 18.7%, health care 14.9%, financial 14.6%, consumer cyclical 11.0%, industrials 10.8%, consumer defensive 10.0%. On the other hand, SPXV has an ever greater tilt toward the top segments sans health care, including tech 21.9%, financial 17.1%, consumer cyclical 12.9%, industrial 12.6% and consumer defensive 11.9%. Similarly, SPXN is also more top heavy sans financials, including tech 22.5%, healthcare 17.7%, consumer cyclical 13.2%, industrials 12.8% and consumer defensive 12.1%.
Investors who believe the Federal Reserve will push off on an interest rate hike may consider something like SPXN as financial services, banks, and insurers would continue to suffer from a low rates environment. Meanwhile, weakness in pharma and biotech, especially given the political risk with Democratic hopeful Hillary Clinton shining a light on high drug costs, could dampen the healthcare outlook, which could make SPXV a strategy to watch.
Additionally, while the energy sector has made a strong rebound this year, crude oil prices remain depressed amid a global supply glut. If the energy sector continues to face depressed crude oil prices, investors may consider the S&P 500 Ex-Energy ETF (SPXE) , which provides exposure to S&P 500 companies with the exception of those included in the Energy Sector, as a way to play the equities market.
Lastly, the S&P 500 Ex-Technology ETF (SPXT) holds S&P 500 companies with the exception of those included in the Information Technology and the Telecommunication Services Sectors, or collectively the Technology Sector.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.