Sector ETF

By: EconomyWatch   Date: 31 July 2009

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Sector ETF is a class of exchange traded fund that invests in a specific sector. Sector ETFs have stocks or other underlying securities pertaining to one sector, globally or nationally. These assets are passively managed and the managers track the underlying index or indices of various data services like S&P 500 or Dow Jones.

 

Sector ETFs can be leveraged, inversed or asset specific such as currency or bank. By using various mechanisms and instruments, they try to maximize profits through diversification and hedging.

 

Why Sector ETFs
 

Sector ETFs are highly popular as they let a trader hedge his investment. Also, they let traders invest in sectors where there is forecast of high profits or speculated growth. Being extremely liquid, buying and selling them is extremely easy.   

Advantages of Sector ETF
 

Sector ETFs are dedicated to a specific investment opportunity, so it comes with many advantages:

  • A trader can make profit by investing in sectors that are currently undervalued or are expected to outperform the other stocks.

  • Trader can move from one sector to another with time. This way, a trader can continue making profits.

  • Sector ETFs offer greater flexibility and thus, more choices for traders to invest in.

 

Disadvantages of Sector ETF
 

As sector ETFs invest in just one sector, the diversity is compromised. Some of the disadvantages are:

  • Sector ETFs have a higher expense ratio. So, it decreases profits.

  • High transaction fee implies that frequent trading can turn expensive.

  • Sector ETFs require sound knowledge of the market forces and its players. Fundamental and technical analyses need to be considered before investing. Note that sector ETFs are speculative in nature.  

Some Popular Sector ETFs  

Following are some of the most popular sector ETFs:

  • Financial Select Sector SPDR (NYSE: XLF)

  • Energy Select Sector SPDR (NYSE: XLE)

  • Oil Services HOLDRs (NYSE: OIH)

  • Technology Select Sector SPDR (NYSE: XLK)

  • iShares S&P North Amer Natural Resources (NYSE: IGE)

  • PowerShares Water Resources (NYSE: PHO)

  • Consumer Staples Select Sector SPDR (NYSE: XLP)

  • UltraShort Oil & Gas ProShares (NYSE: DUG)

  • Semiconductor HOLDRs (NYSE: SMH)

 

Investing in sector ETFs is an effective way to diversify and reap the benefits of the growth and advancement relating to a specific sector.

 


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Most Popular in Exchange Traded Funds

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