Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Unbundle the Stock Market with Sector ETFs

Stock-Markets / Exchange Traded Funds Oct 22, 2009 - 08:30 AM GMT

By: Ron_Rowland

Stock-Markets

Best Financial Markets Analysis ArticleInvestors often think about “the stock market” as if it were some kind of giant creature rumbling through the woods. However, the stock market is more like a whole bunch of little creatures, each of which can move on its own. Yes, there’s a general tendency for equities to go in the same general direction — but there are almost always exceptions.


This makes perfect sense when you think about how industries come into and out of favor with investors. Different types of businesses tend to thrive under different economic conditions.

Sector Winners By Year

For instance, so far this year technology is way up while utilities are mostly flat. In 2008, consumer staples were far ahead of financial services. Energy was the winner in 2007. And back in 2006 the same utilities stocks that are going nowhere this year were the hot sector to own.

Of course, knowing ahead of time which part of the market will outperform isn’t always easy. You have to do your homework and get good advice.

But once you decide where you want to focus, sector exchange traded funds (ETFs) are a great tool to implement your strategy.

Breaking Down the Market …

To illustrate how this works I want you to think about the S&P 500 Index — a list of 500 large stocks selected by a committee at Standard & Poor’s. If you own SPY (an ETF based on the S&P 500), you have a broad position in U.S. stocks: The sectors that are going up and those that are going down or sideways.

Sector ETFs let you break down the S&P  500 into many different industries.
Sector ETFs let you break down the S&P 500 into many different industries.

There is a way, however, to pull apart SPY and concentrate only in the sectors you want. The Select Sector SPDRs are a family of nine ETFs based on the S&P 500 — with a twist. Each of the nine includes only the S&P 500 stocks that belong to a particular industry, and there’s no overlap.

Here is the complete list of Select Sector SPDRs and the number of stocks each owns:

  • SPDR Consumer Discretionary (XLY), 78 stocks
  • SPDR Consumer Staples (XLP), 41 stocks
  • SPDR Energy (XLE), 40 stocks
  • SPDR Financial (XLF), 79 stocks
  • SPDR Health Care (XLV), 53 stocks
  • SPDR Industrials (XLI), 59 stocks
  • SPDR Materials (XLB), 30 stocks
  • SPDR Technology (XLK), 85 stocks
  • SPDR Utilities (XLU), 35 stocks

Add up those numbers and you’ll get 500. If you were to buy all nine funds in just the right proportions, you would own the equivalent of a position in SPY, the S&P 500 ETF.

What are the right proportions? Because the index is weighted by market capitalization, it changes each day. So once you buy your holdings your representative portion of the S&P 500 will automatically adjust with daily market movements. The chart below shows you the breakdown as of 10/16/09.

Sector SPDRs divide the S&P500 into nine sectors

You’ll notice that technology (XLK) currently has the biggest slice of the pie. Materials (XLB) and utilities (XLU) are tiny in comparison. This can change. A few years ago energy (XLE) was only a small part of the pie, too. Watching these changes can reveal a lot about which parts of the economy are growing and shrinking.

These ETFs are great tools to help you add exposure to sectors you like, and perhaps more importantly, avoid exposure to sectors you think are going down.

For instance, suppose you are bullish on technology. If you invest in SPY or any other broad index fund, less than a quarter of your money will be going into tech stocks …

However, if you buy XLK, you’ll get a concentrated portfolio of the largest U.S. technology companies — much more bang for your buck!

The Select Sector SPDRs aren’t the only sector-based ETFs, of course. Similar products are offered by iShares, PowerShares, and other sponsors. Each has its own unique methodology.

You can even drill down further and get more specific sector allocations. For example, in last week’s Money and Markets column I showed you how to play the different sub-sectors within the financials. You can do the same thing with technology, health care, and other sectors, too.

Sector ETFs are, for my money, one of the best investment tools ever invented. Learn more about them and I bet you’ll agree.

Best wishes,

Ron

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in