Sector ETFs

Sector ETFs enable investors to invest in a specific industry in one security.

The world is changing, and so is the market. Different sectors may perform better or worse than normal depending on the circumstances the world finds itself in. While the healthcare sector has turned a profit from Covid-19, the energy sector has done well amid the conflict in Ukraine. Whether it be healthcare, energy, or any other industry, sector ETFs allow investors to buy into a sector of their choosing.

Takeaways

There are 11 sectors in total. Some are sensitive to economic cycles, while others are less sensitive.
Sector ETFs invest in a representative group of companies in a specific sector.
Some sector ETFs pay high dividends while some are known for high growth. But always remember, high return brings high risk.

What types of sectors are there?

Based on the Global Industry Classification Standard (GICS), there are 11 sectors in total.

Generally speaking, cyclical sectors tend to perform well in a robust economy, but they also experience significant declines during a recession. In contrast, sectors less sensitive to economic cycles tend to perform consistently in all economic cycles.

What are sector ETFs?

Unlike an index ETF which tracks the performance of the broad market, a sector ETF tracks the performance of a specific industry. Again, it does so by tracking an index. This is because virtually every major industry group has multiple indexes that track industry performance.

For example, a technology ETF may closely track the performance of the MSCI USA IMI Information Technology Index.

What are the risks and awards?

Investors may want to buy sector ETFs for the following reasons.

To invest in multiple companies in the same industry. Compared with holding stocks of one or several companies, sector ETFs enable investors to spread risks over dozens or hundreds of stocks.
To seek dividends. A sector ETF combines similar stocks in the same sector in one security, and some sectors are known for dividends, for example, the utility sector.
To seek growth. Some sectors are known for high growth, for example, the information sector.

While the rewards are enticing, investors should be aware of the risks as well.

Concentrated risks. Buying ETFs in a specific industry does not mean building a diversified portfolio. When the whole industry goes down, the portfolio is at risk. Investors could diversify by investing in ETFs in different sectors.
High volatility of some sectors. High growth potential comes with high risk. Investors should be prepared for significant losses while expecting high returns.

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An Exchange-Traded Fund’s (“ETF”) prospectus contains its investment objectives, risks, charges, expenses, and other important information, and should be read and carefully considered before investing. ETFs are subject to risks similar to those of other diversified investments. Investing in ETFs involves risk, including the possible loss of principal. Although ETFs are designed to provide investment results that generally correspond to the performance of their respective underlying indices, they may not be able to exactly replicate the performance of the indices because of expenses and other factors. ETF shares cannot be redeemed directly from the ETF. ETFs are required to distribute portfolio gains to shareholders at year-end, which may be generated by portfolio rebalancing or the need to meet diversification requirements. ETF trading may also have tax consequences. An ETF’s expense ratio is the annual operating expense charged to investors.