Sector ETFs are Exchange Traded Funds (ETFs) that invest in specific stock market sectors. A stock market sector is a grouping of stocks of companies that are in similar types of business. For example, software companies are a stock market sector. A software sector ETF called iShares S&P North Amer Tech-Software (IGV) is available that tracks the S&P North American Technology Software Index.
Sector ETFs are designed as targeted investments in specific stock market sectors, and can be quite useful for traders and investors that wish to trade or invest in specific stock market sectors. The main advantage sector ETFs is that they provide trading and investing opportunities across a number of companies within a stock market sector, so anticipated price moves associated with a stock market sector can be capitalized upon without risking a trade or investment in a specific company within a stock sector. A particular stock’s performance is greatly influenced by the performance of the stock sector that the stock is in and vice versa; therefore, investing in sector ETFs is a safer way to invest in stocks than trying to pick winners and losers within a specific stock sector.
Sector ETFs are available for a wide variety of stock market sectors. The following are examples of sector ETFs.
- iShares Dow Jones Transportation Average Index Fund (IYT) – IYT is a sector ETF that seeks to replicate investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Transportation Average Index.
- Vanguard Telecommunication Services ETF (VOX) – VOX is a sector ETF that seeks to replicate the performance of a benchmark index that measures the investment return of telecommunication services stocks.
- Select Sector SPDR Fund – Health Care (XLV) – XLV is a sector ETF that seeks to replicate the price and yield performance, before fees and expenses, of companies in The Health Care Select Sector Index.
While investing in sector ETFs reduces the risk of associated with investing in an individual company, there are portfolio risks associated with investing in sector ETFs versus broad based stock market index investments; and therefore, sector ETFs investments should be limited to a small percentage of an investment portfolio to avoid being overweight in any one stock sector. The same principal applies to using sector ETFs as stock trading vehicles.
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