Recently, sector ETFs have been gaining a lot of attention. You are likely to have heard of sector ETFs if you are a mutual funds investor. This explainer will discuss sector ETFs and the reasons why you should invest.
Sector ETFs, as the name implies, allow investors to invest into sectors such as pharma, IT and finance. Sector ETFs are similar to mutual funds and invest a pooled corpus in stocks of a particular sector. A sector ETF might track an index of pharmaceutical stocks or technology stocks.
Sector ETFs are used by investors for speculation and hedging. These ETFs are liquid like other ETF funds and can be used to reduce the risk of tracking errors due to the underlying price changes even during intraday trade.
Sector ETFs can be used to invest in commodity, bonds or asset portfolios, just like an index fund. ETFs, however, are not listed on the stock exchange and their interday values change according to the fluctuations in the stocks they track. ETF funds are more liquid than other types of investments because they can be traded in stock exchanges. ETFs that invest in specific sectors allow for instant diversification and greater exposure to high-performing industries. ETFs can be attractive investments because they are passively managed funds that have lower investment costs than actively managed mutual funds. However, transaction commissions will still be payable by investors when they buy or sell units.
While most sector ETFs are invested in domestic stocks, some ETFs also provide exposure to foreign companies. The diversified portfolio gives sector exposure to retail investors.
ETFs can be less volatile and are considered safer investment tools because they follow an index with high transparency.
Sector ETFs often provide broad diversification within a sector and many sub-sectors. Analysts, economists, and investors use the Global Industry Classification Standard to determine the primary financial industry-standard measure for sector classification. It allows each company to be assigned to a specific sector. GICS has been created by Standard and Poor's and MSCI, index providers. GICS's hierarchy begins with 11 sector groups and then goes on to include 68 industries, 157 sub-industries and 24 industry groups.
Sector ETFs can be a great option to diversify your portfolio. These ETFs allow you to invest in the most promising sectors for the highest returns.