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Sector ETFs: 2 to Buy, 1 to Avoid

By Dan Caplinger - Nov 14, 2015 at 9:40AM

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With the ability to narrow down your focus with ETFs, picking the right sectors is hugely important.

The energy sector has been a tough place to invest, but could now be the time? Image source: Flickr/Lindsey G.

Exchange-traded funds are a useful tool for investors looking to drill down on particular sectors of the market, with a huge range of sector ETFs designed to let you customize your portfolio exposure. Yet finding the sectors with the best prospects can be challenging. With that in mind, let's look more closely at a few popular sector ETFs to see which look like solid candidates for good returns going forward.

Is the worst over for energy?
The energy sector has been hit hard by plunging crude oil prices, as major players in the industry have seen their revenue and earnings drop in concert with oil's decline. Yet more recently, energy companies appear to be finding a bottom in the market, and that opens the door for investors to consider Vanguard Energy ETF (VDE -5.99%) as a way to play the sector.

Coming into the current earnings season, predictions for energy companies were extremely pessimistic, and several major producers managed to beat expectations and show long-awaited signs of life. With exposure similar to what you'd get from the Select Sector SPDR Energy ETF (XLE -5.74%) but with expenses that are a third cheaper, the Vanguard Energy ETF will let you participate if energy stocks start to bounce more dramatically in 2016.

Betting on stability
Many investors are getting nervous about the overall stock market, pointing to the recent correction during the summer as a sign that the nearly seven-year-old bull market is getting long in the tooth. For those seeking areas of the economy that tend to perform well during stock market pullbacks, the consumer staples arena is an attractive option, and a sector ETF like Vanguard Consumer Staples (VDC -1.20%) or Consumer Staples Select Sector SPDR (XLP -1.41%) can give you a broad portfolio of popular staples stocks.

Consumer staples are often seen as defensive in character because demand for these necessities doesn't respond as much to changing economic conditions as more discretionary purchases. Many consumer staples stocks also have long histories of dividend payouts that grow steadily over time, giving investors even more comfort with their ability to weather temporary market storms. Valuations in the sector aren't terribly cheap, as investors have been somewhat defensive in their posture for some time. Yet when the next economic downturn hits, these ETFs should give your portfolio some protection that more aggressively positioned stocks won't.

All that's golden does not glitter
The commodities market has been a terrible place to invest lately, and although energy has shown some signs of a potential rebound, one area that has remained resolutely downbeat is the precious-metals mining sector. Market Vectors Gold Miners ETF (GDX -5.49%) has been one of the worst performers of 2015, falling 25% so far this year.

Two primary culprits are responsible for the gold miner ETF's poor performance. One is that gold prices have hit their worst levels in nearly six years, following negative trends throughout the precious-metals sector that have sent silver, palladium, and platinum sharply lower as well. Yet even apart from gold prices, operational challenges have hit the mining sector hard as well, and even during periods when metals prices have risen, those internal problems can hold back gold-mining stocks. With many investors fearful of the macroeconomic impact of future monetary policy moves on the precious metals markets, gold mining stocks aren't in a strong position to help the Market Vectors ETF shine in the near future.

Sector ETFs make it easy to focus your investing, but it's important to make the right moves. By identifying the sector ETFs you think have the best chance of rising in value, you can make the most of the opportunities that the financial markets give you.

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Stocks Mentioned

VanEck Vectors ETF Trust - VanEck Vectors Gold Miners ETF Stock Quote
VanEck Vectors ETF Trust - VanEck Vectors Gold Miners ETF
$26.61 (-5.49%) $-1.54
Vanguard World Fund - Vanguard Energy ETF Stock Quote
Vanguard World Fund - Vanguard Energy ETF
$94.66 (-5.99%) $-6.03
The Select Sector SPDR Trust - The Consumer Staples Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Consumer Staples Select Sector SPDR Fund
$72.19 (-1.41%) $-1.03
The Select Sector SPDR Trust - The Energy Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Energy Select Sector SPDR Fund
$68.42 (-5.74%) $-4.17
Vanguard World Fund - Vanguard Consumer Staples ETF Stock Quote
Vanguard World Fund - Vanguard Consumer Staples ETF
$185.71 (-1.20%) $-2.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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