Here are big and liquid funds focused on one flavor of stock.
The universe of stocks is split up into 11 sectors based on the Global Industry Classification Standard, or GICS. These sectors include energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, real estate, communication services and utilities. All the stocks on Wall Street fit into one of these categories, regardless of size or unique properties. For investors who are looking to take a slightly more tactical approach — but still want to play a relatively broad swath of the stock market without getting too focused on unique subsectors or individual companies — these 11 large and liquid sector exchange-traded funds based on GICS classifications offer a nice way to do that.
Vanguard Energy ETF (ticker: VDE)
With 122 of the top energy stocks in the world, VDE offers simple and cost-effective exposure to this key sector. The fund boasts more than $3 billion in assets and a rock-bottom expense ratio of just 0.1%, or $10 annually for every $10,000 invested. You’ll find the portfolio stuffed with a who’s who of Big Oil names such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), but farther down the list you’ll also find equipment and service stocks that aren’t as recognizable. Investors who thought the big sell-off in oil prices at the beginning of 2020 was an overreaction have enjoyed considerable returns in this broad-based energy fund as it rebounded up about 60% from its March lows.
Materials Select Sector SPDR Fund (XLB)
Raw materials providers are a key part of the global economy. And with more than $3 billion in assets and an expense ratio of 0.13%, this sector ETF is an established and affordable way to tap into a portfolio of 28 key materials stocks that includes gold miner Newmont Corp. (NEM) and chemicals icon DuPont de Nemours (DD). There often isn’t tremendous growth in materials stocks, as innovative new products aren’t really in play here. However, investors can normally count on strong baseline demand even in hard times and the potential for modest appreciation when economic activity revs up once more.
Industrial Select Sector SPDR Fund (XLI)
The biggest consumers of those materials created by the materials industry tend to be industrial stocks, which manufacture and transport things. Top components in this fund include logistics giant United Parcel Service (UPS), aerospace icon Boeing Co. (BA) and heavy machinery manufacturer Caterpillar (CAT). With $11 billion in assets under management, more than 70 holdings and average volume north of 10 million shares a day, this is one of the biggest and best sector ETFs for individual investors looking to play industrial stocks in a diversified way. The fund comes with an expense ratio of 0.13%.
Vanguard Consumer Discretionary ETF (VCR)
With a huge portfolio of nearly 300 consumer stocks, VCR is a great way for investors to tap into American spending trends without picking individual stocks. This sector ETF holds some of the biggest brands out there, such as Amazon.com (AMZN) and Starbucks Corp. (SBUX) — but also some smaller and more specialized plays, including restaurateur Wingstop (WING) and outdoor apparel company Columbia Sportswear Co. (COLM). This sector ETF is highly cyclical, and consumer discretionary spending is one of the first budget items to take a hit when the economy sours. That said, if you want to play this broad trend, then this fund is a great way to do that.
Vanguard Consumer Staples ETF (VDC)
In contrast to discretionary spending, staples spending is rock-solid regardless of the economic environment because people still need things like toothpaste, dish soap and breakfast cereal regardless of whether the unemployment rate is heading up or down. With 94 stocks and more than $6 billion in assets, VDC is the best fund to play this trend. There is one larger sector ETF out there, the Consumer Staples Select Sector SPDR Fund (XLP), but personal products giant Procter & Gamble Co. (PG) makes up a staggering 17% of the portfolio. VDC is heavily weighted in P&G, too, but not that much — and it has a slightly lower expense ratio to boot, at 0.1%.
Health Care Select Sector SPDR Fund (XLV)
If you think it’s impossible to find a sector that has both guaranteed demand in tough times but also significant growth potential, then think again. Health care expenditures are a necessity for people who rely on treatments or medication to live longer and more productive lives. The sad reality of American health care is that prices spiral ever higher at a rate that significantly outpaces inflation — including a roughly 5% increase in health care spending in 2019. XLV is a diversified sector ETF that lets you tap into all elements of this trend, through pharmaceutical stocks like Pfizer (PFE) and insurers like UnitedHealth Group (UNH), to everything in between.
Financial Select Sector SPDR Fund (XLF)
One of the biggest ETFs of any flavor, XLF commands more than $17 billion in total assets and trades nearly 70 million shares daily. It’s no surprise why, either, as this fund is a who’s who of the financial sector with top holdings that include JPMorgan Chase & Co (JPM), Bank of America Corp. (BAC) and Citigroup (C). Just about every company and consumer in the U.S. relies on financing from top banks, and an investment in XLF is very much an investment in overall economic activity. That said, just remember the crash of 2008 — and keep in mind that doesn’t mean these are risk-free investments, even if the big banks are highly connected.
Vanguard Information Technology ETF (VGT)
Dwarfing even the popular financial sector ETF, VGT manages almost $39 billion in assets at present — making it one of the 25 largest ETFs on U.S. exchanges, regardless of investment strategy. Once again, the reason for its popularity should be obvious when you look at top components that include Apple (AAPL), Microsoft Corp. (MSFT) and other Big Tech icons. This sector has regularly outperformed the broader stock market as a whole in the long run, and investors looking to bias their portfolio toward information technology should pick this top Vanguard sector ETF among all others. It comes with a relatively low expense ratio of 0.1%.
Communication Services Select Sector SPDR Fund (XLC)
Closely related to tech is the communications sector, which includes the providers that make sure all of these fancy devices and services actually connect to the internet to function. XLC has a focused list of less than 30 total stocks; however, the capital-intensive nature of these companies means there’s simply not a lot of competition in the space. That’s evident in its components, like telecom utilities such as AT&T (T) — but also via 21st century communications stocks such as Alphabet (GOOG, GOOGL), which powers Google searches, YouTube videos and more. The bad news is that these monopoly-like tendencies mean fewer total players. The good news for investors is that this means very stable streams of revenue for those stocks that make up this sector ETF.
Utilities Select Sector SPDR Fund (XLU)
Speaking of utilities, XLU includes the power-related players that stand behind every single business and household in the U.S. The highly regulated nature of this sector and the essential need for electricity means these are among the safest stocks on Wall Street. Again, the list of total components in this ETF isn’t huge — at less than 30 stocks, including names like Dominion Energy (D) — but each utility is effectively a regional monopoly. Furthermore, with a yield of about 3.2% at present, these reliable stocks pass on consistent income to shareholders of this ETF. You may not find a ton of growth here, particularly in an age of energy efficiency, but you will find a degree of certainty that other sectors cannot provide.
Vanguard Real Estate ETF (VNQ)
Believe it or not, real estate was not even seen as a discrete sector of the S&P 500 until 2016. However, the proliferation of publicly traded stocks that focus on this segment of the economy led folks to rethink how to slice and dice the market. VNQ is actually much older than this reformulation, with an inception date of 2004. It focuses on real estate investment trusts, or REITs, such as Digital Realty Trust (DLR). A longer track record meant it had a head start on the competition, helping it rack up some $30 billion in total assets — and when you add in its related mutual fund that follows the same strategy, it comes to almost $58 billion. If you want to play top mall operators or industrial park managers, VNQ is your go-to sector ETF.
Eleven top sector ETFs to buy:
— Vanguard Energy ETF (VDE)
— Materials Select Sector SPDR Fund (XLB)
— Industrial Select Sector SPDR Fund (XLI)
— Vanguard Consumer Discretionary ETF (VCR)
— Vanguard Consumer Staples ETF (VDC)
— Health Care Select Sector SPDR Fund (XLV)
— Financial Select Sector SPDR Fund (XLF)
— Vanguard Information Technology ETF (VGT)
— Communication Services Select Sector SPDR Fund (XLC)
— Utilities Select Sector SPDR Fund (XLU)
— Vanguard Real Estate ETF (VNQ)
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