Sector ETFs offer tactical investment opportunities.
There are many different ways to slice and dice the stock market: growth or value, small caps or large caps, entrenched legacy companies or money-losing startups. But one of the more common ways to sort stocks is to divide the universe of investments into 11 different sectors based on the Global Industry Classification Standard. These sectors are communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, materials, real estate, technology and utilities. The following 11 exchange-traded funds, or ETFs, each represent unique ways to play one of those sectors in a single, simple holding.
Consumer Discretionary: Consumer Discretionary Select Sector SPDR Fund (ticker: XLY)
With more than $14 billion under management, this SPDR sector fund is the go-to way to play domestic consumer discretionary stocks. Its portfolio comprises about 60 companies across the category, led by e-commerce giant Amazon.com (AMZN), electric vehicle manufacturer Tesla Inc. (TSLA), fast food icon McDonald’s Corp. (MCD) and home improvement giant Home Depot Inc. (HD) in the first four spots. As you can tell by this lineup, this sector ETF has pretty wide variety within the sector even though the companies all are a play on discretionary spending trends. Most of these stocks would generally take a hit as a group if consumers cut back significantly on their budgets, but the diversification within the sector allows for a pretty well-rounded ETF all the same.
Consumer Staples: Vanguard Consumer Staples ETF (VDC)
In contrast to discretionary spending, staples spending is rock solid regardless of the economic environment because people still need toothpaste, dish soap and breakfast cereal regardless of whether the unemployment rate is heading up or down. With about 100 total components and more than $6 billion in assets, VDC is the best fund to play this trend. Big brands like Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and PepsiCo. Inc. (PEP) lead the portfolio, showcasing the kind of large and stable companies that are typical in the consumer staples sector. Even if the broader economy hits a snag, you can depend on these companies generating reliable revenue as loyal shoppers continue to purchase their products.
Energy: iShares Global Energy ETF (IXC)
There’s no shortage of energy sector funds out there, but many domestic large-cap funds are massively overweight in Big Oil giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). This iShares fund also has them at No. 1 and No. 2, commanding more than 27% of the portfolio, but that’s actually not bad when you consider that leading U.S.-focused fund Energy Select Sector SPDR ETF (XLE) has more than 42% in both of those stocks at present. What’s more, IXC has a global strategy to include overseas megacaps like Shell PLC (SHEL) and BP PLC (BP). This $2 billion fund isn’t the biggest, but it probably provides the best exposure to the largest energy stocks in the world via one simple holding. And with IXC up about 40% year to date as of Oct. 24, it’s been a very profitable way to play rising energy prices lately.
Materials: Materials Select Sector SPDR ETF (XLB)
Raw materials providers are a key part of the global economy, and with red hot inflation in 2022 there is increased interest in investing in the companies that make up the first step in global supply chains. With more than $5 billion in assets, this sector ETF is an established and accessible way to tap into about 30 leading materials stocks that include industrial gas giant Linde PLC (LIN), miner Freeport-McMoRan Inc. (FCX) and chemicals icon Dow Inc. (DOW). Just keep in mind that while rising materials costs can be good for these companies, any cyclical downturn that saps industrial demand could be problematic.
Industrials: Industrial Select Sector SPDR ETF (XLI)
Speaking of industrial demand, manufacturing and transportation stocks make up one of the sectors that traditionally has been a bellwether of global economic growth, and XLI is the largest and most-established fund to play industrials, with some $12 billion under management. Top components in this fund include aerospace and defense giant Raytheon Technologies Corp. (RTX), conglomerate Honeywell International Inc. (HON) and logistics giant United Parcel Service Inc. (UPS) to name a few representative names. Perhaps surprisingly, XLI has performed a bit better than the broader S&P 500 in 2022. That’s in part because these companies already had been under pressure previously from supply chain disruptions. Thanks to changes in strategy over the last year or two, they have actually seen improvement in operations lately despite a challenging environment for other sectors.
Health Care: Health Care Select Sector SPDR ETF (XLV)
Perhaps the most recession-proof sector of all, health care companies see consistent business even when other businesses suffer. That’s because a visit to the doctor remains a necessity for people who rely on treatments or medication to live longer and more productive lives, so they’ll cut back on just about anything before they cut back on their health care expenses. XLV is a roughly $38 billion, diversified ETF that plays this sector through more than 60 different holdings, including insurance giant UnitedHealth Group Inc. (UNH), Band-Aid and Tylenol manufacturer Johnson & Johnson (JNJ) and big pharma mainstay Eli Lilly and Co. (LLY).
Financials: Financial Select Sector SPDR Fund (XLF)
Yet another SPDR ETF on this list, this financial sector fund commands about $29 billion in assets and is made up of about 70 of the largest financial institutions in the U.S. Top holdings include Warren Buffett’s Berkshire Hathaway Inc. (BRK.B), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC). Financial stocks have been benefiting from rising interest rates, which lift the margins that they charge on loans to businesses and consumers. But on the other hand, the threat of a downturn in general business activity is also weighing on shares. Banks are highly connected to broader economic activity, so if you want to play long-term growth trends then this financial sector ETF could be worth a look, even if the short-term outlook is admittedly murky right now.
Information Technology: Vanguard Information Technology ETF (VGT)
VGT is one of the biggest ETFs on Wall Street, with about $39 billion in assets under management even after some rather obvious pain for the sector this year. That makes it one of the top 30 ETFs on U.S. exchanges, and one of the most liquid and popular investments of any variety. You won’t be surprised by top components that include Apple Inc. (AAPL), Microsoft Corp. (MSFT), Google parent Alphabet Inc. (GOOG, GOOGL) and others. Perhaps equally unsurprisingly, VGT is down about 30% this year, as many of the Big Tech names have come under pressure. However, if you have a long-term perspective, it’s hard to argue against the potential of stocks in this sector when measured in years instead of months.
Communication Services: Communication Services Select Sector SPDR Fund (XLC)
XLC is a roughly $8 billion communications sector ETF that includes wireless data providers and infrastructure companies. Given the wide moats that incumbent players have, there’s not a lot of competition in the telecom industry, meaning XLC has a pretty focused list of about 30 total stocks. That’s evident in its components, which include telecom utilities such as AT&T Inc. (T) but also 21st century communications stocks like Alphabet that dominate digital ad markets worldwide. There may be a short list of holdings, but the good news is that these are all top-tier communications firms with reliable revenue streams.
Utilities: Utilities Select Sector SPDR Fund (XLU)
Speaking of reliable revenue streams, it’s hard to find more consistent investments than utility stocks. Electricity, natural gas and water providers often have geographic monopolies as well as strong baseline demand for their services and strict regulatory oversight that make it difficult for the business landscape to change quickly. The $15 billion XLU is another fairly focused fund, including about 30 of the largest publicly traded utilities on Wall Street. But with a decline of only about 8% so far this year, which is less than half the decline of the broader S&P 500 index, you get plenty of stability despite a short list of holdings. You’ll also collect a 3.1% dividend yield on top of that.
Real Estate: Vanguard Real Estate ETF (VNQ)
The flip side of super stable utilities lately has been the real estate market, which has been hit hard by the economic uncertainty along with the rising interest rate environment. Increasing borrowing costs make it hard for companies focused on properties to finance new growth, which is part of the reason this sector fund is down about 30% this year. However, VNQ is a diversified fund with more than 160 holdings that may be a good long-term holding despite recent volatility. In addition to a play on the upside of real estate generally, you also get a generous 3.9% dividend in this sector ETF.
11 top sector ETFs to buy:
— Consumer Discretionary: Consumer Discretionary Select Sector SPDR Fund (XLY)
— Consumer Staples: Vanguard Consumer Staples ETF (VDC)
— Energy: iShares Global Energy ETF (IXC)
— Materials: Materials Select Sector SPDR ETF (XLB)
— Industrials: Industrial Select Sector SPDR ETF (XLI)
— Health Care: Health Care Select Sector SPDR ETF (XLV)
— Financials: Financial Select Sector SPDR Fund (XLF)
— Information Technology: Vanguard Information Technology ETF (VGT)
— Communication Services: Communication Services Select Sector SPDR Fund (XLC)
— Utilities: Utilities Select Sector SPDR Fund (XLU)
— Real Estate: Vanguard Real Estate ETF (VNQ)
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11 Top Sector ETFs to Buy originally appeared on usnews.com
Update 10/25/22: This story was published at an earlier date and has been updated with new information.
