Factors to Consider when Choosing a Sector ETF

As sector exchange traded fund (sector ETF) is a type of an exchange traded fund (ETF) that is designed to track an index consisted of companies operating in the a specific sector in the economy. Such companies offer similar or related products or services within a given sector like energy (energy ETFs), technology (technology ETFs), utilities (utility EFTs), real estate (real estate ETFs), consumer staples (consumer staples ETFs), and so on.

Certain sector ETFs may specialize even further with a sector or focus only on companies that meet particular size ore revenue requirements. A subsector fund concentrates on a specific industry subgroup within a sector.

For selection of a sector ETF, a number of relevant factors need to be considered, including:

• Diversification: the degree to which an investor with a concentrated position in a single stock holding can avoid duplicating sector exposure with a total market position through a sector ETF. As such, holding sector ETFs with exposure to other sectors may help to reduce diversifiable risk in the portfolio.
• Exposure to a specific sector: sector ETFs allow investors to have a view on a specific sector of the economy that may be beneficially correlated or uncorrelated to certain expected occurrences.
• Size: whether the ETF strictly confine holdings a certain size of a company’s market capitalization (such as, small-cap or large-cap).
• Geography: whether the ETF holdings are limited to a certain country or region or to international sector stocks.
• Scope: the number of companies that are classified within a chosen sector and held by the ETF. Scope also includes the degree by which a fund is further limited to only a particular industry within the overall sector.

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