ETFs help you drill down deeper into the stock market sectors.
Exchange-traded funds, or ETFs, that track stocks in one of the 11 stock sectors are a simple and cost-effective way to gain access to an entire slice of the stock market, while avoiding the potential downside of one company’s troubles having an outsize effect on your portfolio. Those sectors, as determined by the Global Industry Classification Standard, are energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, communication services, utilities and real estate. However, ETFs can also provide options for those looking to add a twist on their core portfolios by targeting a subset of the broader industry. For example, an investor buying an industrials fund may not realize they’re also buying exposure to United Parcel Service Inc. (ticker: UPS), as the transportation and logistics industry falls under that sector. Here’s a list of industry ETFs to consider buying in 2022 if you’re looking for a targeted play on a larger sector.
Financials: iShares U.S. Insurance ETF (IAK)
IAK tracks the Dow Jones U.S. Select Insurance Index, which follows a weighted index of insurance firms with at least $250 million in market value. It counts Chubb Ltd. (CB), Progressive Corp. (PGR) and MetLife Inc. (MET) among its largest holdings. The fund has a 95% correlation rate with financial companies in the S&P 500 over the last three years, meaning IAK will closely track changes in its parent index. IAK’s insurance tilt can maintain value when the markets fear an economic slowdown, as a recession can reduce demand for consumer and business credit and in turn cut into lender revenue. Insurance companies are less likely to see heavy drops in revenue because customers need home, health and property insurance no matter where they are in the economic cycle. IAK charges an expense ratio of 0.42%, or $42 in annual fees for a $10,000 investment.
Energy: First Trust Natural Gas ETF (FCG)
Energy stocks tend to move in tandem with oil prices. But FCG tracks a basket of companies that specialize in natural gas prices: 15% of its assets are in midstream partnerships that manage infrastructure, while the rest track energy producers. Midstream operators like Western Midstream Partners LP (WES) and DCP Midstream LP (DCP) are the top holdings and give FCG some independence from the moves of oil while still including oil producers like Occidental Petroleum Corp. (OXY) to keep it correlated to the broader energy sector. FCG costs an expense ratio of 0.6% to hold.
Materials: SPDR S&P Metals & Mining ETF (XME)
XME tracks metal miners and producers in the S&P Metals and Mining Select Industry Index, representing one industry segment in the wider materials sector. The fund lists Nucor Corp. (NUE), Reliance Steel & Aluminum Co. (RS) and Steel Dynamics Inc. (STLD) as its top three holdings, but each of the 32 companies it tracks is limited to no more than 5% of the fund’s overall weight as of July 26. XME has recently outperformed its parent sector due to inflationary demand for metals, generating a return of 64%, compared to 35% for the Materials Select Sector SPDR ETF (XLB) over a three-year period to July 26. However, XME is subject to the same commodity boom-and-bust cycles that underlie energy stocks over a multiyear period. Keep that in mind when building a portfolio designed to pay for retirement or a major purchase. XME will cost you an expense ratio of 0.35%.
Industrials: SPDR S&P Aerospace & Defense ETF (XAR)
XAR follows an equal-weighted index of aerospace and defense stocks designed to allocate 40% of its assets to large– and medium-cap companies, with the remaining 20% assigned to small-cap companies. This method leads to a fund where no single stock makes up a large piece of the overall fund, with Boeing Co. (BA) the top holding at 4.32% and Virgin Galactic Holdings Inc. (SPCE) following at 4.02% as of July 26.
Consumer Discretionary: Invesco Dynamic Leisure & Entertainment ETF (PEJ)
While consumer discretionary is a difficult sector to hold in 2022 due to inflation and souring consumer sentiment, PEJ could stand out for volatility-sensitive investors since it doesn’t include Tesla Inc. (TSLA). Tesla stock is included in the wider consumer discretionary sector since it’s the most valuable automaker in the market, making up 19.2% of the Consumer Discretionary Select Sector SPDR Fund (XLY). However, TSLA has acted like a proxy for growth sentiment over the past two years, and its stock price could be hit since CEO Elon Musk has pledged a portion of his own Tesla shares as debt collateral for the acquisition of Twitter Inc. (TWTR) that he is attempting to nullify. Those factors could have an outsize negative impact on the sector’s overall performance.
Consumer Staples: First Trust Nasdaq Food & Beverage ETF (FTXG)
FTXG follows the Nasdaq U.S. Smart Food & Beverage Index, which prioritizes food-and-drink makers by price returns, cash flow and historical volatility. That tilt toward products that are always in demand no matter the economic situation has kept it at a year-to-date return of 2.9% through July 26, and that’s nothing to scoff at in a “risk off” market environment. Molson Coors Beverage Co. (TAP) and Kellogg Co. (K) are the largest holdings in the fund, at 8.53% and 8.14%, respectively. FTXG costs an expense ratio of 0.6%.
Information Technology: VanEck Semiconductor ETF (SMH)
SMH tracks the 25 largest semiconductor producers listed on American exchanges, making it a concentrated bet on the chips that power devices produced by Apple Inc. (AAPL) and Microsoft Inc. (MSFT), among others. Semiconductor makers tend to move in line with the growth-heavy technology sector and have been weighed down by supply chain disruptions, but chipmaker revenues are diversified because chips are also used by companies in other sectors, such as automakers included in the consumer discretionary sector. SMH costs an expense ratio of 0.35% to hold.
Health Care: VanEck Pharmaceuticals ETF (PPH)
Health care is a defensive sector during choppy markets, and pharmaceuticals are one of the steadier industries in the group. PPH follows the MVIS U.S. Listed Pharmaceutical 25 Index and targets companies with wider research pipelines. These companies are less risky than biotechnology companies that often spend years researching one or a small handful of potential treatments while operating off investor capital that’s seeking the next blockbuster drug. This is especially true when the risk-off environment favors companies with established cash flows. PPH charges an expense ratio of 0.35%.
Real Estate: iShares Residential & Multisector Real Estate ETF (REZ)
REZ follows an index of real estate stocks and trusts targeting residential, health care and self-storage properties. That cuts out exposure to industrial and commercial real estate for investors betting that e-commerce and remote work are here to stay. The fund offers that narrower focus while still keeping a 94% correlation in price movements to the Real Estate Sector SPDR Fund (XLRE). REZ costs an expense ratio of 0.48%.
Communication Services: Invesco S&P 500 Equal Weight Communication Svc ETF (EWCO)
The communication services sector lives and dies by a handful of heavyweight technology names like Alphabet Inc. (GOOG, GOOGL), Facebook owner Meta Platforms Inc. (META) and Netflix Inc. (NFLX). These names posted stunning gains in the past decade and exploded during the pandemic and through 2021, but fears over dwindling subscriber growth have spurred dramatic single-day drops for communications firms this year. EWCO holds these names, but balances them so no stock has an outsize effect on the fund. This amounts to a trade-off where the potential for big gains is traded in for some diversification and protection in the event a big stock in the sector posts disappointing growth. EWCO’s top holdings as of July 26 include Netflix at 5.23%, Microsoft acquisition target Activision Blizzard (ATVI) at 4.56% and Walt Disney Co. (DIS) at 4.52%. EWCO costs an expense ratio of 0.4%.
Utilities: John Hancock Multifactor Utilities ETF (JHMU)
The utility sector leans defensive, as its businesses tend to have price controls set by state utility commissions and companies can rely on customers prioritizing keeping the power on over other purchases during economic turmoil. JHMU differentiates itself by holding both large- and mid-cap stocks, then uses a weighting scheme to build in a bias toward smaller companies with lower price-to-book ratios and higher profits relative to their peers. The fund has stayed broadly in line with the Select Sector Utilities SPDR Fund (XLU) over a trailing-12-month basis and is showing a 1.8% gain this year through July 26, against the 0.3% gain for XLU. As of July 26, JHMU’s largest holding is Exelon Corp. (EXC) at 6.05%, followed by Xcel Energy Inc. (XEL) and Consolidated Edison Inc. (ED) at 5.55% and 5.45%, respectively. It costs an expense ratio of 0.4%.
Targeted ETFs to buy in all 11 market sectors:
— Financials: iShares U.S. Insurance ETF (IAK)
— Energy: First Trust Natural Gas ETF (FCG)
— Materials: SPDR S&P Metals & Mining ETF (XME)
— Industrials: SPDR S&P Aerospace & Defense ETF (XAR)
— Consumer Discretionary: Invesco Dynamic Leisure & Entertainment ETF (PEJ)
— Consumer Staples: First Trust Nasdaq Food & Beverage ETF (FTXG)
— Information Technology: VanEck Semiconductor ETF (SMH)
— Health Care: VanEck Pharmaceuticals ETF (PPH)
— Real Estate: iShares Residential & Multisector Real Estate ETF (REZ)
— Communication Services: Invesco S&P 500 Equal Weight Communication Svc ETF (EWCO)
— Utilities: John Hancock Multifactor Utilities ETF (JHMU)
More from U.S. News
Update 07/27/22: This story was published at an earlier date and has been updated with new information.