Look beyond broad market funds with sector ETFs.
According to the commonly accepted Global Industry Classification Standard, every stock can be sorted into one of 11 different high-level groupings. These sectors are communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, materials, real estate, technology and utilities. In a challenging market environment like the one we’ve seen over the last year or so, it’s common for certain sectors to stand tall — as we saw with energy in 2022 — and others to crumble — as we saw with tech. As we start 2023, the pundits are debating which sectors will be in favor this time around. But depending on your point of view, the following list of 11 sector exchange-traded funds, or ETFs, should provide a way for you to get tactical exposure to just one sliver of Wall Street stocks.
Consumer discretionary: Vanguard Consumer Discretionary ETF (ticker: VCR)
At $4 billion under management, this Vanguard sector fund is definitely well established. But it’s worth noting that it’s actually the No. 2 consumer discretionary ETF by market size, falling behind the $13 billion Consumer Discretionary Select Sector SPDR ETF (XLY) by a significant margin. However, the ETFs are similar in makeup and boast almost identical listings of top components — e-commerce king Amazon.com Inc. (AMZN), EV manufacturer Tesla Inc. (TSLA) and fast food icon McDonald’s Corp. (MCD) in the top three spots of both. The difference is that VCR has 58% in its 10 largest positions, while XLY has 70% of all assets in its top 10. This makes it just as direct a play, but slightly more diversified.
Consumer staples: Vanguard Consumer Staples ETF (VDC)
A similar story exists for VDC. There’s a larger alternative out there in Consumer Staples Select Sector SPDR Fund (XLP), which commands $17 billion or so in assets compared to less than $7 billion for VDC. But the two funds boast a very similar lineup of top stocks, including Procter & Gamble Co. (PG) and Coca-Cola Co. (KO), and VDC is slightly more diversified with 62% of assets in its top 10 holdings as opposed to 70% for XLP. It’s worth noting, too, that both offer rock-bottom fee structures at just 0.10% in annual expenses, or $10 a year on $10,000 invested. So either way, you get a great slice of low-risk consumer staples companies with one of these sector ETFs.
Energy: Energy Select Sector SPDR Fund (XLE)
While Vanguard squeezed out the last few SPDR sector ETFs, the gulf between No. 1 and No. 2 is mighty large in the energy sector, with XLE boasting some $42 billion in assets, compared with less than $9 billion for the next fund in line. Investment research firm Morningstar gives the fund five stars, its highest rating, thanks to a low cost structure and massive liquidity. It’s also elegantly simple, with only about two dozen U.S. megacaps to keep investors out of the smaller, volatile explorers and in diversified and integrated energy giants such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). The energy sector may not put up the same returns as last year, but this sector still looks strong in an era of elevated commodity prices and persistent inflation.
Materials: SPDR S&P Metals and Mining ETF (XME)
Speaking of commodity prices, metal and mining stocks are a great way to get in on the ground floor of the materials sector. There are other slightly larger funds, including those dedicated to just gold miners, but XME provides a much more diversified mix with no single position representing more than 5% of the portfolio. And with $2.5 billion in assets right now, XME is certainly no slouch. Holdings include precious metals companies such as Royal Gold Inc. (RGLD) but also “base” metals companies such as aluminum leader Alcoa Corp. (AA), copper king Freeport-McMoRan Inc. (FCX) and even nuclear materials company Uranium Energy Corp. (UEC). If you want a true play on raw materials instead of a fund that is mostly made up of gold miners, XME is a great bet.
Industrials: The Industrial Select Sector SPDR Fund (XLI)
The next step in the supply chain after raw materials are the industrial companies and manufacturers that actually turn those commodities into goods or move the refined materials around the global economy. XLI is by far the largest and most established fund to play industrials, with some $14 billion in assets. Top components in this fund include aerospace and defense giant Raytheon Technologies Corp. (RTN), conglomerate Honeywell International Inc. (HON) and heavy machinery icon Caterpillar Inc. (CAT). There are admittedly concerns about global growth right now, but with news of China opening up its economy once more, there could be big industrial demand out of Asia even if markets in the U.S. and Europe aren’t looking so keen. If you want a stake in big, global industrial names then XLI is your ticket.
Health care: Health Care Select Sector SPDR ETF (XLV)
One of the biggest exchange-traded funds of any flavor, XLV is a more than $41 billion sector fund that ranks among the top 30 or so U.S.-listed ETFs by assets. That means if you want to play health care, this is the most popular way to do so. As one of the most recession-proof sectors of all, health care attracts investors because one of the few things that is certain in life is that we all get sick and grow old. XLV is a diversified play on this big-picture trend, including 60 leading U.S. stocks such as insurance giant UnitedHealth Group Inc. (UNH), Band-Aid and Tylenol manufacturer Johnson & Johnson (JNJ) and big pharma mainstay Merck & Co. (MRK).
Financials: The Financial Select Sector SPDR Fund (XLF)
Yet another mega-sized SPDR ETF on this list, this financial sector fund is the runaway leader in the space with $32 billion in assets. It’s 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). Part of the reason that XLF is so popular right now is because rising interest rates tend to benefit financial institutions like these that hold a lot of assets. In the long term, XLF remains a mainstay for investors regardless of the rates outlook because it is the largest and most liquid play to get exposure to leading U.S. lenders and investment banks.
Information technology: Vanguard Information Technology ETF (VGT)
VGT is neck-and-neck with the Technology Select Sector SPDR ETF (XLK), as both have more than $40 billion in assets under management and represent the largest Silicon Valley firms on Wall Street. Both are also cheap index funds, charging just 0.10% in annual fees. But what gives VGT the edge is the fact that its portfolio is roughly five times larger, with some 370 different components to less than 80 for XLK. Both are market-cap weighted, so they have most of their assets in the same short list of mammoth tech stocks, such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). But when you look further down their list of holdings, it’s clear that VGT offers a deeper look at the sector.
Communication services: Communication Services Select Sector SPDR Fund (XLC)
If you’re looking to play the communications services sector, XLC is your best bet. The fund includes digital communications stocks such as Alphabet Inc. (GOOG, GOOGL) and Facebook parent Meta Platforms Inc. (META), data providers and infrastructure companies such as Verizon Inc. (VZ), and other traditional telecoms. XLC has a focused list of less than 30 total stocks, but the good news is that these are all top-tier communications firms that collectively dominate the communication services sector. XLC holds roughly $9 billion in assets and offers a 1.1% yield.
Utilities: Vanguard Utilities ETF (VPU)
In what may be a familiar argument, this $6 billion fund edges out the SPDR sector fund yet again despite having a smaller bankroll. That’s because it is still significant in scale and offers a similarly low fee structure, but boasts a portfolio that is significantly larger and thus more diversified. Admittedly, utility stocks tend to look very similar to each other and have lower risk profiles than companies in other sectors. Electricity, natural gas and water providers often have geographic monopolies, strong baseline demand and strict regulatory oversight that makes it difficult for the utility landscape to change quickly. That said, VPU’s lineup of 60 stocks makes it twice as large as its peer, the Utilities Select Sector SPDR ETF (XLU).
Real estate: Schwab US REIT ETF (SCHH)
While the SPDR and Vanguard families both have a lot going for them, they certainly aren’t the only games in town when it comes to ETFs. This Schwab sector ETF makes the cut as the best real estate-focused fund because it may not be the largest, but it offers a slightly cheaper and more diversified approach. And while not the biggest, it certainly is well established at $6 billion in assets spread across more than 160 holdings. To be clear, this is not just a play on housing or office operators. SCHH’s top positions include warehouse operator Prologis Inc. (PLD), telecom tower company American Tower Corp. (AMT) and other unconventional real estate plays to give investors full exposure to the sector.
11 top sector ETFs to buy:
— Consumer discretionary: Vanguard Consumer Discretionary ETF (VCR)
— Consumer staples: Vanguard Consumer Staples ETF (VDC)
— Energy: Energy Select Sector SPDR Fund (XLE)
— Materials: SPDR S&P Metals and Mining ETF (XME)
— Industrials: The Industrial Select Sector SPDR Fund (XLI)
— Health care: Health Care Select Sector SPDR ETF (XLV)
— Financials: The Financial Select Sector SPDR Fund (XLF)
— Information technology: Vanguard Information Technology ETF (VGT)
— Communication services: Communication Services Select Sector SPDR Fund (XLC)
— Utilities: Vanguard Utilities ETF (VPU)
— Real estate: Schwab US REIT ETF (SCHH)
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11 Top Sector ETFs to Buy originally appeared on usnews.com
Update 01/26/23: This story was previously published at an earlier date and has been updated with new information.
