Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

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

© 2005-2019 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

6 Critical Money Making Rules