Expect Growth For Industry, Sector ETFs

When exchange-traded funds burst onto the scene in the United States over two decades ago, advisors and investors viewed these instruments as cost-effective, efficient tools for gaining exposure to broad market indexes, such as the S&P 500, NASDAQ-100 and the MSCI Emerging Markets Index.

ETFs, Broad Market Exposure And Investors

Today, broad market exposure is a still a primary driver of growth for equity-based ETFs. For example, the SPDR S&P 500 ETF Trust SPY is the world's largest ETF, and eight of the 10 largest U.S. ETFs are simple index-tracking funds providing broad market exposure to U.S. or international stocks.

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However, advisors and investors are increasingly warming to the tactical advantages of having some direct sector exposure via ETFs. While still not on par with broad market funds, a fair amount of sector and industry ETFs are found among the largest U.S. ETFs. Of the 100 largest U.S. ETFs as ranked by assets, 16 are sector or industry ETFs, a group that includes familiar names such as the Financial Select Sector SPDR Fund XLF, the Energy Select Sector SPDR (ETF) XLE and the Market Vectors Gold Miners ETF GDX.

Investor Sentiment

State Street Global Advisors (SSgA), the third-largest U.S. ETF issuer and the largest sponsor of sector ETFs, recently polled nearly 420 advisors and wealth managers regarding their use of sector and industry ETFs. While the findings vary, the overall tone bodes well for the current and future growth of sector and industry funds.

“Over 85 percent of survey respondents had some exposure to sector and/or industry funds, with more than a quarter of them indicating that sector/industry investing was a major part of their US equity strategy,” said SSgA. “Interestingly, uncertainty about how to execute a sector investing strategy was a key factor cited by non-users, who often indicated a willingness to try sector/industry investing if given sufficient information and guidance.”

SSgA data suggest many respondents to the survey use sector or industry ETFs for tactical exposure or as satellite positions. However, some money managers use sector and industry funds to complement core equity exposure and as a way of generating low-cost alpha.

Sector Outperformance

In any given year, there are sectors and industries that outperform the broader market. Last year, the S&P 500 gained about 1.4 percent, but the Consumer Discretionary SPDR (ETF) XLY climbed 10 percent.

“Seven months into 2016, and this year is no different in terms of the dispersion among sectors — once again presenting investors with potential opportunities to extract a return in excess of the standard market through a rotational based strategy,” added SSgA.

Disclosure: Todd Shriber owns shares of XLF.