A few popular sectors include:
Information technologyIndustrialsEnergyHealth careTransportation or industrialsReal estateMaterialsUtilities
Sector ETFs may be referred to as industry ETFs, although this is not common.
How Sector ETFs Work
Sector ETFs allow you to invest in an entire industry and typically, track major indexes (such as the Standard & Poor’s 500) within a given industry. When you purchase an ETF, you do not own shares in a company. Instead, the fund originator owns the assets, creates a fund to track a particular index, and sells fund shares to investors. ETFs are often considered safer investments than stocks, but they may yield lower returns. Sector ETF performance will vary, depending on the industry you select.
Types of Sector ETFs
There are 11 sectors you can invest in with sector ETFS, shown here with their Select Sector Standard & Poor’s Depository Receipt (SPDR) ETF ticker, or trading, symbols. They are:
Energy: XLE—companies that develop energy Materials: XLB—companies that manufacture raw materials Communication Services: XTC—telecommunications and transmitting companies Industrials: XLI—construction, aerospace, industrial machinery, waste management, tools, and metal fabrication companies Consumer Discretionary: XLY—companies in the non-essential goods industries Consumer Staples: XLP—companies that manufacture and distribute primary goods such as food, household supplies, beverages, and other essential items Health Care: XLV—manufacturers of health and medical care items, drugs, and health services providers Financials: XLF—companies involved in providing financial services such as mortgages, loans, banking, and consumer finance offerings Technology: XLK—companies producing software, hardware, or internet-related programming Real Estate: XLRE—companies involved in buying and selling property Utilities: XLU—companies delivering and transporting energy to residences and businesses
Alternatives to Sector ETFs
Sector ETFs offer varied stability, depending on which industry you select. Many investors opt to own ETFs across all or a few major sectors. While sector ETFs can round out a well-diversified investment portfolio, alternative options could include broad index ETFs, market index funds that follow the S&P 500 or the Dow Jones Industrial Average (DJIA), and mutual funds. Investing directly in stocks is another option that can sometimes yield higher returns. However, stock investing can require more of a time commitment because you’ll need to follow company financial performance and projections closely, and be ready to sell or buy as dictated by the market. Stocks are also riskier investments.
Pros and Cons of Sector ETFs
Pros Explained
Tax benefits: Most sector ETFs only incur taxes at the time of sale of the investment, unlike mutual funds, which incur tax burdens during the lifetime of the investment.Less risk: Sector ETFs are generally seen as less-risky investments, particularly when spread across multiple industries.Easy to research: If you’re new to investing, sector ETFs will feel less alien than some stock types because the industries will likely be familiar and the companies involved are usually easy to understand and research.Good diversification options: If you choose to spread your money across several top-performing sector ETFs, you can build out a well-diversified portfolio.
Cons Explained
May have high fees: While ETFs generally have low fees, because you’ll purchase them through a trading partner, be prepared to pay higher commission fees and trading costs than with individual stocks.Single-sector ETFs limit diversification options: If you only invest in one industry, you’ll be limiting your chances to diversify.Lower returns: While ETFs are generally considered safer investments, returns can be fairly predictable and less exciting than stocks.
Are Sector ETFs Worth It?
Investing in a variety of sector ETFs can be a good addition to any portfolio, but sector ETFs aren’t a great strategy for growing long-term wealth, because you will yield stable but relative low returns.
How To Invest in Sector ETFs
You can begin investing in sector ETFs through online and traditional brokerages, such as Vanguard, Fidelity Investments, or Charles Schwab. Some online investment platforms, like Schwab’s TD Ameritrade, also offer sector ETFs.
