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.

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