The right sector ETFs can outperform the broad market.
The stock market is a big place full of many different companies. With the help of the Global Industry Classification Standard, or GICS, it’s simple to divide Wall Street into 11 clear sectors that each have a distinct flavor and rely on unique circumstances that may allow them to move independently of the stock market as a whole. As one of the largest providers of exchange-traded funds on the planet, State Street Global Advisors has an array of 11 popular and liquid sector funds that allow investors to tap into any of the standard GICS categories in a simple and cost-effective way — as all these funds have an annual expense ratio of 0.13%, or $13 for every $10,000 invested. Here are the 11 SPDR sector ETFs to buy now if you want to take a sector-focused approach in your portfolio.
Technology Select Sector SPDR Fund (ticker: XLK)
This tech fund is not just the largest of the SPDR sector ETFs, but one of the largest ETFs on Wall Street — period. The fund boasts more than $38 billion in assets under management. There’s a reason for its popularity, as it holds more than 70 of the most dynamic and in-demand tech stocks on Wall Street such as Apple (AAPL) and Microsoft Corp. (MSFT). Be cautious, since these two holdings alone make up 40% of the entire portfolio because of their size. There are other more diversified tech funds out there, but if you want a Big Tech focus and an established fund, this SPDR sector ETF is worth a look.
Financial Select Sector SPDR Fund (XLF)
Another big-time sector ETF, the XLF fund is a one-stop shop for investors looking to play banks and financial services companies. The fund currently has nearly $29 billion in AUM. Comprised of more than 60 of the biggest names on Wall Street like Berkshire Hathaway (BRK.B), JPMorgan Chase & Co. (JPM) and Citigroup (C), you’ll get direct exposure to the financial sector in a popular and liquid fund. Just be aware that XLF is also weighted toward a short list of larger companies, with around 30% of its assets in those aforementioned financial stocks.
Health Care Select Sector SPDR Fund (XLV)
Another megafund that is well-capitalized and features high trading volume, XLV is the SPDR sector ETF that’s focused on health care. The $26 billion fund spans all aspects of the industry, from pharmaceuticals to equipment suppliers to insurance companies. Top stocks at present are Johnson & Johnson (JNJ), UnitedHealth Group (UNH) and Merck & Co. (MRK). While the trio represents about 20% of total assets and the fund is admittedly top-heavy, it’s not quite as skewed toward its top positions as other SPDR sector funds and is spread around its 60 or so holdings a bit more evenly.
Consumer Discretionary Select Sector SPDR Fund (XLY)
The consumer-focused XLY fund is the go-to way for investors to play discretionary spending trends on things like home goods, clothing, dining out and auto sales. Right now, top holdings Amazon.com (AMZN) and Tesla (TSLA) make up almost 40% of assets and give this $19 billion ETF a decidedly tech-focused flavor. But the rest of 60 or so names on its list includes more traditional discretionary names such as restaurat chain McDonald’s Corp. (MCD) and home improvement retailer Home Depot (HD).
Industrial Select Sector SPDR Fund (XLI)
Industrials may not be as high-profile as consumer stocks or tech companies, but they make up an important segment of the global economy. As a result, many investors want a sector ETF that can represent this industry in their portfolio directly. XLI holds about 70 stocks across a variety of subsectors in the industrial sector, including railroad stock Union Pacific Corp. (UNP), aerospace giant Boeing Co. (BA) and heavy machinery manufacturer Caterpillar (CAT), to name a few. Assets total nearly $17 billion. And since there are fewer megacap giants in the sector, it is more diversified than other SPDR sector ETFs with only about 25% in its top five holdings.
Energy Select Sector SPDR Fund (XLE)
Energy is a massively important sector, and it’s undergoing a big evolution right now in the age of climate change and sustainability concerns. XLE only has about 25 holdings at present — with less than $16 billion in AUM — and more than 40% of assets in integrated energy giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) alone, but it remains one of the go-to funds for investors looking to play this sector. Particularly for those who want direct exposure to oil prices, this SPDR sector ETF may be worth a look in 2021.
Consumer Staples Select Sector SPDR Fund (XLP)
In contrast to the aforementioned discretionary fund, XLP is a staples-focused investment option. This roughly $13 billion SPDR sector ETF is comprised of companies that make and sell necessities people buy in both good times and bad, including personal products giant Procter & Gamble (PG), beverage and packaged foods giant PepsiCo (PEP) and big-box retailer Walmart (WMT), which actually holds the largest share of the grocery store market in addition to selling everything from housewares to clothing. As with the other SPDR sector ETFs, this fund is top-heavy with about 35% of assets in these three picks alone, but it’s still a good direct play on staples sales.
Communication Services Select Sector SPDR Fund (XLC)
The formal GICS classification of “telecom” doesn’t actually have that many U.S. companies, given the stranglehold that Verizon Communications (VZ), AT&T (T) and T-Mobile (TMUS) have on the marketplace. XLC isn’t all that bigger, with fewer than 30 total positions, but it casts a slightly broader net to include internet services giants like Facebook (FB) as well as TV, movie and entertainment powerhouse Walt Disney Co. (DIS). That puts a bit more substance behind this $12 billion SPDR sector ETF, even if Facebook alone has a 20% allocation and the fund has comparatively fewer names to spread its investments around.
Utilities Select Sector SPDR Fund (XLU)
Another fairly limited fund, XLU has less than $12 billion in assets and fewer than 30 total holdings because there simply isn’t a ton of competition in the utilities sector. After all, utilities are often regional monopolies thanks to the highly regulated nature of the industry and the wide moats that prevent competition or disruptions to existing demand trends. Top holdings at present include NextEra Energy (NEE), Duke Energy Corp. (DUK) and Southern Co. (SO).
Materials Select Sector SPDR Fund (XLB)
Raw materials companies are very unique in that they don’t make the finished goods or provide the services that most consumers and investors see in their day-to-day life. That said, these behind-the-scenes stocks are critical to the global economy as they provide the building blocks for almost every other company on Wall Street. These include the chemicals produced by firms like Linde (LIN) and miners like Newmont Corp. (NEM). This is another sector in which there aren’t that many established stocks, so be advised that XLB is also comprised of fewer than 30 components.
Real Estate Select Sector SPDR Fund (XLRE)
The smallest SPDR sector ETF (at a little more than $2 billion in assets) is also the newest to the GICS family, as real estate was only formally broken out of financials as its own stand-alone sector in 2016. After all, publicly traded real estate firms operate much differently than investment banks or consumer lending companies. In contrast, XLRE holds a focused list of 30 companies that are structured as real estate investment trusts, or REITs, thanks to their massive holdings of physical property. This includes Prologis (PLD), which owns millions of square feet of warehouses, and mall operator Simon Property Group (SPG), to name a couple top holdings.
Eleven SPDR sector ETFs to buy now:
— Technology Select Sector SPDR Fund (XLK)
— Financial Select Sector SPDR Fund (XLF)
— Health Care Select Sector SPDR Fund (XLV)
— Consumer Discretionary Select Sector SPDR Fund (XLY)
— Industrial Select Sector SPDR Fund (XLI)
— Energy Select Sector SPDR Fund (XLE)
— Consumer Staples Select Sector SPDR Fund (XLP)
— Communication Services Select Sector SPDR Fund (XLC)
— Utilities Select Sector SPDR Fund (XLU)
— Materials Select Sector SPDR Fund (XLB)
— Real Estate Select Sector SPDR Fund (XLRE)
More from U.S. News