When exchange traded funds first burst onto the investment scene nearly three decades ago, the offerings were mostly limited to broad market funds, but sector ETFs later followed.
These days, sector ETFs are big business. Of the 100 largest U.S.-listed ETFs by assets, nearly a dozen a are sector funds, a number that’s significant if industry funds are included. That’s actually a good segue into what I’m going to address here.
Sector ETFs and industry funds are different. The 11 sectors addressed in the S&P 500 are as follows (in order of weight in the index): technology, healthcare, consumer discretionary, communication services, financial services, industrials, consumer staples, utilities, real estate, energy, and materials.
Examples of industry ETF would be a biotechnology fund because biotech is considered a healthcare industry. Or a gold miners ETF because that’s a sub-group of the broader materials space.
For the purposes of this piece, sector ETFs are the focus. Here are 10 of the best on the market today.
- Fidelity MSCI Information Tech ETF (NYSEARCA:FTEC)
- Invesco S&P SmallCap Health Care ETF (NASDAQ:PSCH)
- KraneShares MSCI All China Health Care Index ETF (NYSEARCA:KURE)
- Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY)
- Pacer Benchmark Data & Infrastructure Real Estate ETF (NYSEARCA:SRVR)
- ProShares Online Retail ETF (NYSEARCA:ONLN)
- Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ)
- BlueStar Israel Technology ETF (NYSEARCA:ITEQ)
- Invesco S&P SmallCap Information Technology ETF (NASDAQ:PSCT)
- Utilities Select Sector SPDR (NYSEARCA:XLU)
Fidelity MSCI Information Tech ETF (FTEC)
Expense ratio: 0.0840% per year, or $8.40 on a $10,000 investment
The Fideliy MSCI Information Tech ETF is a winner on multiple fronts, particularly for long-term investors because this is the least expensive fund in its category. That’s not unusual because all of the Fidelity sector ETFs are the cheapest in their respective spaces.
FTEC is nearly seven years old, which is actually young among cap-weighted sector ETFs, but it’s a fast-grower in this arena as highlighted by $4.2 billion in assets under management. Advisors and investors intending to be engaged with this fund for lengthy holding periods see a clear advantage with its low-cost status.
Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) combine for over 37% of FTEC’s weight, and while that’s indicative of concentration in this or any other cap-weighted tech ETF, the risk is worth taking on as both companies continue delivering growth and have more growth levers to pull, potentially propelling those stocks to new highs.
Invesco S&P SmallCap Health Care ETF (PSCH)
Expense ratio: 0.29% per year
The healthcare sector is in vogue in a big way this year because it’s the epicenter of the fight against the novel coronavirus. Up 14% over the past 90 days, the Invesco S&P SmallCap Health Care ETF is participating in some of that bullishness.
PSCH’s 74 holdings are companies “engaged in the business of providing healthcare-related products, facilities and services, including biotechnology, pharmaceuticals, medical technology and supplies,” according to Invesco.
A word of caution: PSCH isn’t the sector ETF to buy for those in search of COVID-19 vaccine exposure. That’s because medical device makers and healthcare providers combine for over 49% of the fund’s weight. That’s a more near-term issue than long-term knock on PSCH. In fact, PSCH has been a valid long-term idea as it has absolutely crushed the Russell 2000 and S&P Small Cap 600 indexes over the past three years.
KraneShares MSCI All China Health Care Index ETF (KURE)
Expense ratio: 0.65% per year
As noted above, the healthcare sector is hot this year, but it’s even hotter in China. There are dedicated China healthcare ETFs, both of which are soaring in 2020.
Check out the KraneShares MSCI All China Health Care Index ETF, which is higher by 50% this year. Undoubtedly, some of this bullishness is attributable to speculation that with China being the birthplace of the coronavirus, it will also be home to a cure or a vaccine.
That remains to be seen, but there’s a compelling long-term story with KURE, one that centers around China’s aging population and its status as one of the world’s fastest-growing healthcare markets.
“There is still opportunity for considerable growth in China’s healthcare market with per capita health spending at just $398, compared to an average of over $6,500 for the world’s top eight healthcare markets in terms of per capita expenditure,” according to KraneShares.
KURE has the feel of an equivalent U.S. sector ETF as it is heavy on pharmaceuticals, biotechnology and medical equipment makers, but also sprinkles healthcare tech and traditional Eastern medicine firms – exposures that are lacking from standard funds in this category.
Consumer Discretionary Select Sector SPDR (XLY)
Expense ratio: 0.13%
Looking for a sector ETF that’s a viable proxy on Amazon (NASDAQ:AMZN) stock? With a 24.12% weight to that name, the Consumer Discretionary Select Sector SPDR is a fund to consider. XLY is holding up remarkably well this year given the mostly negative effects Covid-19 has on consumer spending. That underscores the point that XLY is home to e-commerce juggernauts, namely Amazon; essential retailers and companies that are adapting to the online retail boom, such as Target (NYSE:TGT).
Regarding consumer spending, June was the least bad month for that metric since the start of the pandemic. That could provide some support to XLY in the back half of the year even though consumer cyclical names look slightly overvalued.
“Earnings forecasts, though down sharply due to the pandemic, have stabilized a bit over the last month and analysts foresee a quick rebound next year with sales eclipsing prior highs,” said AltaVista Research.
Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
Expense ratio: 0.60% per year
Many of the sector ETFs for the real estate group are prosaic, if not boring, but that has started to change a bit in recent years. The Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF is one of the funds leading that change. More importantly, SRVR is a the center of some pivotal, long-term, technological disruption.
One way of looking at some SRVR components is that these companies act as the backbone of the internet. Others are providing the foundation for cloud computing and 5G. That combination has SRVR up more than 24% over the past year while the S&P 500 Real Estate Index is down 6.39%.
SRVR yields 1.65%, which is low among REIT ETFs, but data center REITs aren’t among this year’s REIT dividend offenders of which there are plenty. In 2020, there have been 36 REIT dividend suspensions and 26 cuts, but the bulk of that negative action is centered in sub-groups SRVR provides no exposure to.
ProShares Online Retail ETF (ONLN)
Expense ratio: 0.58% per year
As noted above with XLY, online retail is a mega-trend that’s minting a slew of winners of this year. That group includes the ProShares Online Retail ETF, which is up 61% year-to-date. Yes, it sure helps when an ETF devotes over 40% of its weight to Amazon and Alibaba (NYSE:BABA), as is the case with ONLN.
Given ONLN’s impressive 2020 showing, it’s not unreasonable to say the fund is due for a pullback, one that could arrive over the near-term because of recent retrenchment in Amazon stock. However, the reality is e-commerce is in its early innings and ONLN is nowhere close to being done delivering for investors.
“The growth of e-commerce and struggle of some legacy retailers is a trend that was in place long before stay-at-home orders and may be poised to continue long after the economy is reopened,” according to ProShares. “What’s more, it appears to be an ongoing transformative trend, which may result in long-term investable opportunities.”
Global X MSCI China Consumer Discretionary ETF (CHIQ)
Expense ratio: 0.65% per year
Global X has a full suite of China sector ETFs, and the Global X MSCI China Consumer Discretionary ETF is one of the best of the bunch for many of the same reasons that make the aforementioned ONLN a compelling idea.
Translation: CHIQ is highly levered to the theme of Chinese e-commerce as Alibaba and JD.com (NASDAQ:JD) combine for 16.50% of the fund’s weight. China is the world’s largest internet and a rising electric vehicle destination, too, but there’s more to the CHIQ story, and it comes in the form of the People’s Bank of China (PBOC) acting swiftly to prop up the world’s second-largest economy.
“The PBOC is actively looking to stimulate the economy through measures other than rate reductions,” notes Global X. “In March, the PBOC reduced reserve ratios by 0.5%-1% depending on the size of the bank in order to inject $79 billion into the economy. China indicated they may reduce this ratio further. Growth in credit being extended, particularly to households, is expected to rise further.”
That says the central bank is on the side of the Chinese consumer — a benefit for CHIQ.
BlueStar Israel Technology ETF (ITEQ)
Expense ratio: 0.75% per year
After the U.S. and China offerings, the number of sector ETFs with direct ties to other countries is low, but the BlueStar Israel Technology ETF is a practical option given the depth and growth of Israel’s technology sector.
Israel’s equity market is far smaller than that of the U.S. and its technology sector is more concentrated, but with ITEQ, that concentration can work to investors’ benefit because the fund is more geared to exciting, disruptive themes such as 3D printing, cloud computing, cybersecurity, and health tech than a comparable U.S.-focused fund.
Despite its diminutive status in global benchmarks, Israel has long been one of the better-performing ex-U.S.-developed markets. Technology is a prime reason why. Over the past 12 months, ITEQ is up more than 29% while the MSCI Israel Index is lower by half a percent.
Invesco S&P SmallCap Technology ETF (PSCT)
Expense ratio: 0.29% per year
The technology sector is often viewed through the lens of mega-cap stocks. Apple and Microsoft, among others, have that effect. However, the combination of tech and small-cap names is a potentially potent marriage and the Invesco S&P SmallCap Technology ETF proves as much. In fact, nearly 52% of PSCT’s 75 holdings are classified as growth stocks.
Small-caps are cyclical. As such, they were bludgeoned during the March coronavirus market meltdown, but the group is rebounding with tech powering some of that recovery. Plus, small-cap earnings estimates are improving while valuations remain attractive.
“Earnings revisions are rebounding sharply, while small caps are pricing in a steep fall,” notes Credit Suisse. “Valuations look attractive: U.S. small caps are looking unusually cheap on both P/B and DY relative to large caps.”
Semiconductor stocks must support upside for PSCT because the fund devotes over 56% of its weight to those names and components makers.
Utilities Select Sector SPDR (XLU)
Expense ratio: 0.13% per year
Among sector ETFs, utilities funds like the Utilities Select Sector SPDR are generally considered boring, with income being the most exciting trait offered by this group. XLU yields 3.25%, far exceeding the yields on the S&P 500 and 10-year Treasuries.
This sector usually isn’t associated with growth, but for patient investors, XLU can offer some growth as renewables become a more significant part of the energy equation.
“Natural gas infrastructure development underpinned much of the sector’s growth during the last decade. Renewable energy will be this decade’s growth opportunity,” notes Morningstar. “Utilities that are more aggressive, with billion-dollar investments in projects like offshore wind and utility-scale batteries, could be big winners.”
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.