ETF Investors Go Sector-Crazy

Assets at exchange-traded funds (ETFs) have been on the rise in 2005, increasing roughly 8% percent this year. However, the expansion of assets under management in State Street's so-called Select Sector SPDRs -- which divvy up the S&P 500 into nine sector-specific ETFs -- has been much more dramatic: They've reportedly climbed 26%.

It shouldn't surprise anyone that the Energy SPDR (AMEX: XLE  ) leads this sector charge; its corner of the market has moved sharply higher in tandem with the price of oil. The Financial SPDR (AMEX: XLF  ) has nipped at Energy's heels, though, while the one focused on Materials (AMEX: XLB  ) has also seen a healthy inflow increase.

I write regularly about ETFs in the Fool's Champion Funds newsletter service (click here for a free trial), but the funds I prefer track tried-and-true indexes, not sliced-and-diced versions of them.

Don't get me wrong: I'm not 100% averse to sector funds. We've recommended two of them in the newsletter thus far. I would argue, however, that you have to be extremely picky with these puppies. Any strategy that involves making bets on individual sectors courts volatility -- as the sector goes, so goes your investment.

Moreover, sector-specific investing seems at odds with one of the main reasons for index funds' popularity among so many investors: They can help keep the road to retirement relatively smooth.

Beyond that, some investors have a bad habit of chasing performance, and ETFs -- which trade throughout the day like stocks -- make it all too easy to succumb to that particular temptation. Indeed, I suspect that dynamic may be at least partly responsible for the asset growth spurt of the Energy SPDR. If I were a sector-betting man, I'd actually avoid Energy and look carefully at the Industrial SPDR (AMEX: XLI  ) , where assets actually declined last month.

I'm not a sector-betting man, though. I continue to believe that broadly diversified bogey trackers such as the S&P-shadowing SPDRs (AMEX: SPY  ) and Vanguard's Total Stock Market (FUND: VTSMX  ) -- which, after all, sport plenty of exposure to energy stocks as well -- are generally better bets for the majority of index investors. For most index-minded Fools, sector-specific SPDRs may well be a tangled web.

Shannon Zimmermanheads upMotley FoolChampion Funds, the newsletter designed to beat the market -- and put the "fund" back into "fund investing." Shannon owns shares of the Vanguard Total Stock Market fund. The Fool has a strictdisclosure policy.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 492785, ~/Articles/ArticleHandler.aspx, 4/19/2014 3:23:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement