Investing in Sector ETFs

Investors shouldn’t put all of their eggs in one basket.

Diversifying your investment portfolio can help to reduce risk and boost potential long-term returns. Sector-tracking exchange-traded funds (ETFs) can ensure you're investing in a variety of assets while still maintaining a targeted approach.

These innovative financial instruments allow you to invest in a specific market sector, giving you exposure to a group of stocks that closely track your chosen industry or subindustry. With sector ETFs, you can trade focused sectors with ease, taking advantage of sector-specific trends and opportunities for profit.

Market sectors are a way of organizing the stock market into different groups based on the nature of the businesses or industries in which the companies operate. The Global Industry Classification Standard (GICS) is the most widely used system for categorizing market sectors. It includes 11 different sectors, such as information technology, real estate, and health care.

You can put your money to work in specific market sectors through sector ETFs. Let’s have a look at some of the most popular sector ETFs tracking each of the 11 GICS sectors.

You’ll often see State Street (STT -0.18%), S&P Depositary Receipts (SPDR) and Vanguard Index Fund in this list -- and for good reason. The two fund families come with market-leading scale and investor interest, and their management fees are among the lowest in the industry.

The two are not exactly the same, though. Their top sector ETFs often track subtly different sector indexes, resulting in different performance profiles. So even with these top-shelf fund managers, you want to take a closer look at the available choices before picking a sector ETF.

22 top sector ETFs in 11 GICS sectors

Best Technology Sector ETFs

Vanguard’s largest technology ETF mirrors the MSCI (MSCI -12.38%) US Investable Market Information Technology 25/50 index, which tracks almost 370 stocks in the GICS Technology sector. Its counterpart from the SPDR family focuses on GICS Technology stocks in the S&P 500 (SNPINDEX:^GSPC) index. That’s a shorter list but still more than 75 names.

The top 10 holdings (by index weight and by the total market value of the holdings) of the ETFs are identical, led by Apple (AAPL 0.44%) and Microsoft (MSFT 1.4%). However, the different index structures lead to some shuffling among the ranks.

Best Healthcare Sector ETFs

The largest SPDR ETF in the healthcare sector replicates the Healthcare GICS sector in the S&P 500, while Vanguard goes for a longer list from MSCI. Once again, their top holdings are essentially the same, with outsized parcels of Johnson & Johnson (JNJ 0.12%) and UnitedHealth Group (UNH -0.0%). Still, the SPDR family sticks closely to an elite list of sector stocks; Vanguard prefers a broader index.

Best Consumer Discretionary Sector ETFs

The normal pattern continues: Amazon (AMZN 0.19%) and Tesla (TSLA 1.65%) are the largest investments by far among both Vanguard’s and SPDR’s lists of consumer discretionary stocks, although the ETFs track different indexes.

Best Financial Sector ETFs

Don’t worry -- you’ll see some different fund managers soon. However, SPDR and Vanguard face off again, armed with their preferred index lists.

Best Communication Services Sector ETFs

The more things change, the more they stay the same. Alphabet (GOOG 0.97%) (GOOGL 1.14%) tops both lists, followed by Meta Platforms (META 2.11%). In this sector, Vanguard’s top ETF meets the Fidelity MSCI Communication Services ETF, which tracks exactly the same MSCI index. Their asset lists are nearly identical, but their 10-year returns differ. Also, Fidelity offers an expense ratio just below the 0.1% mark we usually see from Vanguard and SPDR.

Best Industrials Sector ETFs

The sector ETF giants get back to their extended sector-by-sector duel, equipped with their long (Vanguard) and short (SPDR) lists of index components.

Best Consumer Staples Sector ETFs

Here's the last Vanguard vs. SPDR matchup on my list. No surprises since two indexes with different diversification profiles still manage to deliver very similar top 10 lists and comparable long-term returns.

Best Energy Sector ETFs

The Alerian MLP ETF lands on this list despite a high expense ratio, thanks to a dividend yield recently hovering near 8%. The fund’s tight focus on the natural gas subsector also sets it apart from the SPDR option’s preference for giants such as ExxonMobil (XOM -0.29%) and Chevron (CVX -0.35%). Only you can decide whether the generous dividend is worth the sky-high expense ratio and higher level of market risk.

Best Utilities Sector ETFs

Investment firm BlackRock (BLK 0.79%) manages the iShares family of exchange-traded funds, including the popular iShares U.S. Utilities ETF. Its concentration on domestic utility stocks may sound different from the SPDR ETF’s usual list of S&P 500 tickers until you realize that the S&P 500 only includes U.S. companies. You should take a second look at the SPDR option and its lower expense ratio before jumping on the iShares alternative.

Best Real Estate Sector ETFs

The Schwab fund recently switched its focus from a sector-wide index to the more refined Dow Jones Equity All REIT Capped Index, which excludes mortgage-backed securities and hybrid REITs. As always, Vanguard prefers a full-blast MSCI index. It’s refreshing to see another unusual name offering a lower expense ratio.

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Best Materials Sector ETFs

Finally, subsector ETFs from the gold industry sport more investor interest than the sector-wide tracking options from SPDR and Vanguard. However, it should be noted that even the SPDR team charges much higher management fees for an ETF matching the ups and downs of gold prices.