What are sector exchange-traded funds (ETFs)?
Sector ETFs offer investors a way to target a specific part of the market that they believe will perform well. For example, if investors believe that the healthcare sector is poised for growth, they can invest in a healthcare sector ETF.In this article, we’ll look at sector exchange-traded funds (ETFs): what they are exactly, and how they can be used in an investment portfolio.
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What are sector ETFs?
Sector exchange-traded funds (ETFs) are a type of security that tracks the performance of a particular economic sector. These funds can be used to gain exposure to industries like health care, technology, or energy or tilt your portfolio towards a specific economic sector. Unlike mutual funds, which are composed of various investments within a single sector, ETFs offer a convenient way to invest in a particular industry using just one security. And because they trade like stocks on an exchange, you can buy and sell them throughout the day.
This flexibility makes them attractive to traders who want to take advantage of shifting market conditions. For example, if you think the healthcare sector is poised for growth, you can buy a healthcare sector ETF. But if the sector underperforms or you change your mind about the outlook, you can sell the ETF just as quickly.
Sector ETFs vs broad market ETFs
While sector ETFs offer a way to target a specific part of the market, they come with some risk. Because these funds are focused on a particular industry, they tend to be more volatile than broad market ETFs.
For example, the SPDR S&P 500 ETF (SPY) tracks the performance of the 500 largest companies in the United States and is considered a broad market fund. In contrast, the SPDR S&P Biotech ETF (XBI) is a sector ETF that focuses on the biotech industry.
During the first quarter of 2020, when the coronavirus pandemic caused widespread panic and a sell-off in the stock market, the SPDR S&P 500 ETF lost 14.0%. The SPDR S&P Biotech ETF, on the other hand, fell 26.4%.
While sector ETFs can offer greater potential rewards, they also come with higher risks. Before investing in a sector ETF, understand the risks involved and how these funds can fit into your overall investment strategy.
How to invest in sector ETFs
If you’re interested in investing in sector ETFs, there are a few things you need to know. First, you’ll need to decide which sector you want to target. Then, you’ll need to choose an ETF that tracks the performance of that sector. For example, if you’re interested in the healthcare sector, you could invest in the SPDR S&P Biotech ETF or the iShares U.S. Healthcare ETF (IYH).
Once you’ve chosen an ETF, you’ll need to open an account with a broker that offers access to the ETF. From there, you can place a buy order for the number of shares you want to purchase. And like any other stock or ETF, you’ll pay a commission each time you buy or sell shares of a sector ETF.
Sector ETFs can offer a convenient way to target a specific part of the market. But before you invest, make sure you understand the risks involved.
The risks of investing in sector ETFs
Before investing in a sector ETF, it’s essential to understand the risks involved. Sector ETFs are more volatile than broad market ETFs, which means they can lose value more quickly during a market downturn.
They also tend to be more volatile than individual stocks, and this is because they’re composed of a basket of stocks representing a particular industry or sector. And while this diversification can help reduce risk, it also means that sector ETFs can be more volatile than individual stocks.