12 Exchange Traded Funds that cover various sectors
Disclaimer: The content in this article seeks to provide more information, is solely my opinions, and does not constitute financial advice. Please do your own due diligence and understand that financial transactions carry risks. Information such as index components and prices (among others) are based on information available in June 2021.
I started to write this article because I’ve been receiving questions from friends regarding investments in Exchange Traded Funds (ETFs). A basic explanation of ETFs and other common financial products can be found here.
Here is the main question which I try to provide possible answers to:
What are some ETFs I can invest in?
ETFs offer some advantages which are great for investors still trying to grasp how the markets work in general. Here are just some of the benefits:
- You don’t have to individually invest in all of the component stocks while gaining exposure to an index or an industry sector
- ETFs are diversified in nature (benefits of diversification can be found here)
- Tradeable over most broker platforms throughout the day
For these reasons, I will present some building blocks for a diversified ETF portfolio: The Sector Select SPDRs.
SPDR stands for Standard and Poor’s Depository Receipt and is a trademark of the S&P Global. SPDR funds are ETFs that are managed by State Street Global Advisors (a large asset manager).
These are 11 ETFs that follow the Global Industry Classification Standard of the S&P 500. The stocks held by these ETFs are mostly US companies, so purchasing them would also give you some exposure to the US economy.
In layman: The 11 ETFs split the S&P 500 into 11 different groups of companies based on different industries (eg. Energy, Financials, Information Technology etc.)
Here is a rundown of the 11 Sector Select SPDR ETFs. I’ll provide some commentary from a Singaporean’s perspective (which may differ if you come from a different country).
The XLK is one of the largest in terms of net assets among the 11 SPDR ETFs, with a value of $39 B as of writing. It holds high-demand technology stocks such as Microsoft, Apple, NVIDIA, and Visa. One notable point is that Apple and Microsoft both make up about 40% of their holdings.
My opinion: This ETF provides good exposure to top technology companies while providing diversification. Some of these stocks are expensive (e.g. Nvidia at ~650 USD, Microsoft at ~250 USD), so it will take quite a bit of capital to build a well-diversified technology portfolio containing these stocks. On the other hand, the XLK costs ~140 USD.
The XLF holds several well-known financial institutions such as Berkshire Hathaway, JPMorgan Chase & Co., BlackRock. The financial institutions here include investment banks, asset managers, and payment firms, among others. It has a high traded volume at 39M (for comparison, we have XLK at 5.6M and XLV at 8M).
My opinion: Great exposure to financials for the same reason mentioned above for the XLK (eg. BlackRock is ~900 USD). These are good companies that have withstood the test of time (eg. the 2008 Financial Crisis) and are currently innovating to be relevant.
Top stocks in XLV include Johnson & Johnson, UnitedHealth Group, and Pfizer, with these 3, making up about 20% of the fund’s composition. The fund covers several aspects of the healthcare industry, from pharmaceuticals to equipment suppliers to consumer products.
My opinion: With COVID-19 a central theme in 2020 and 2021, the prospects of some companies in this ETF may be elevated. The XLV recovered close to pre-COVID levels in about a month (March 2020 — Apr 2020) and has been on a steady uptrend since.
XLY: Consumer Discretionary
Consumer discretionary goods include those that skew more towards the luxury side, such as auto, clothing, dining, etc. As of now, the top 2 holdings Amazon and Tesla, make up 35% of the ETF’s holdings. It makes the ETF look tech-focused, but it also holds other well-known consumer brands such as McDonald’s, Nike, and Starbucks.
My opinion: A good mix of companies; some technology and some well-known retail brands. With Amazon and Tesla making up about a third of holdings, this may go well with the XLK with some diversification into the retail sector..
Many of the companies in this ETF’s portfolio are responsible for greasing the wheels of the global economy. Some of the well-known companies include Boeing, Caterpillar, General Electric, and 3M.
The top 2 holdings are Exxon Mobil and Chevron, with a total of about 42% of the fund’s assets. The energy sector is gaining more attention in recent years because of themes such as sustainability.
XLP: Consumer Staples
Consumer staples refer to necessities. The demand for these goods generally doesn’t fluctuate together with market cycles. Notable companies in the top 10 holdings include Procter and Gamble, Pepsi, and Coca Cola.
XLC: Communication Services
On top of telecom companies such as T-Mobile, the XLC also include internet giants and entertainment companies. The top 2 holdings are Facebook and Google at a total of 45%, and other well-known companies include Netflix and Activision Blizzard.
The XLU has a pretty limited holding with less than 30 stocks, largely due to regional monopolies in the utility sector. The top 3 holdings are NextEra Energy, Duke Energy, and Southern Company.
Honestly, I’ve never heard of these companies but I think that is to be expected as we don’t really think utilities companies have reaches beyond their country.
Similar to the XLU, the XLB consists of less than 30 stocks. Many of the companies in this ETF are not exactly well-known to the average retail investors as they deal with raw material rather than finished goods. Some more familiar names include DuPont and Ecolab.
XLRE: Real Estate
The XLRE is a relatively small ETF with a net asset of about $3B. The XLRE consists of companies structured as real estate investment trusts (REITs). Well-known companies include Prologis and CBRE.
Here are some ways to make use of the knowledge gained from the (very) brief introduction to build an investment portfolio (with a slightly more US markets focus):
- Hold an ETF that tracks a broad-based index (eg. S&P 500 index and the SPDR S&P 500 Trust ETF) with overweights in specific sectors
- Run a portfolio management strategy by tracking the trailing Sharpe ratio of various sectors such as in here or seeking trends in sector returns using methods highlighted here
- Buy individual ETFs for sectors you would like exposure to
- Use the ETFs as a proxy of sector performance for building predictive models
While I advocate for learning the ropes of investments by actually committing cash, it is understandable that not every investment opportunity is suitable for everyone. ETFs are essentially equity investments, and while they are less risky than individual equity investments by virtue of diversification, they still carry similar risks to equities. This means that the loss of money is still a very probable situation, and you should only commit cash if you know what you are getting into (and commit what you are willing to lose).
If you are unable to accept losses or unwilling to take the risk, then these ETFs investments are likely not suitable.
ETFs are definitely a good starting point for beginner investors. Using ETFs with techniques such as dollar-cost averaging (eg. through monthly investment amounts) will help investors break into the market in a relatively safe manner*, provide the opportunity to learn while getting some action, and gain the confidence to execute transactions.
- Note that general risks that apply to equity investments apply to ETFs as well and that relatively safe doesn’t mean safe.