Three Sector ETFs Advisors Might Be Missing

Sudden shifts may open up opportunities in mobile payments, pharmaceuticals and real estate.

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Reviewed by: etf.com Staff
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Edited by: Ron Day

W.C. Fields, the early 20th century comedian, was quoted as saying “I once spent a year in Philadelphia, I think it was on a Sunday.” 

That sums up last week's stock market, volatility-wise, as the Nasdaq 100 rolled over and the “nerds” of recent stock market performance (small caps, the Dow, industries that don’t appear to have an immediate boost from artificial intelligence) rallied sharply.  

Maybe this is just another one of those endless “buy the dip” moments for ETFs like the iconic Invesco QQQ Trust (QQQ). Or maybe this is that time market bulls have been waiting for, when the rest of the market joins party, and it truly becomes a stock market, rather than a market of a few great stocks. That’s for the future to determine.

But what months like July 2024 do is to get financial advisors (which I used to be) and self-directed investors (as I am now) scrambling to see if there are some sectors or industries in the vast ETF landscape that might just represent the start of something big. Or even very big. Because just last week as of July 9, the tally looked like this over the past three years: S&P 500 up 33%, average of the top 1,000 US stocks up 2%.  

Industry and Sector ETFs

Just as it was looking like the “nerds” were going to underperform until the millennial generation is collecting social security, the stock market re-booted like the popular TV series, “Sex and the City.” Because just like that, certain industry and sector ETFs came to life, particularly in the large cap segment of the stock market.

As I often do, I conducted an ETF screen to try to identify a few comeback stories. As is typically the case at times like this, there’s a lot of potential. But that doesn’t pay the bills. 

I tried to improve the odds by narrowing things down to ETF with $100 million to $500 million in assets, which have been around at least three years, and which are more “concentrated” in that their top 25 holdings comprise at least 50% of the portfolio’s assets. 

That led me to a group of ETFs that typically had between 20 and 40 holdings, which for sector and industry ETFs, seems more fitting than funds that own hundreds of stocks, and over-diversify. Here are the three of several I decided to write on here. They look to have some potential, both fundamentally and technically, over the 12 months and beyond.  

Pharma, Mobile Payments, Real Estate

Leading off, is the $117 million Invesco S&P 500 Equal Weighted Real Estate ETF (EWRE). It yields 2.8% and like its cousins in the equal weighted ETF space, has not garnered the attention that capitalization-weighted funds have in its nine-year history. Maybe it should, since REIT indexes tend to overweight narrow segments of the field, such as data center REITs. Not so with this 33 stock ETF.

The $298 million Amplify Mobile Payments ETF (IPAY) is another nine-year-old fund, and its focus is 40 stocks that make monetary exchange for commercial purposes more efficient. At 16 times forward earnings and with a three-year annualized return of -10%, this one caught my eye as a turnaround candidate.

And the $281 million Invesco Pharmaceuticals ETF (PJP) is the veteran of the group, having hit the market back in 2005. Its concentrated 25-stock portfolio stood out in one very interesting respect. While its holdings range in market capitalization size from under $1 billion to more than $800 billion, all stock weightings lie between 2.5% and 6.5%. That methodology prevents the portfolio from getting skewed over time, as has been the case with the cap-weighted QQQ and most S&P 500-based ETFs.

We’ll see if the past week of chaotic stock market activity, where the paupers suddenly become market kings, continues. If it is a trend shift and more than just a blip, advisors can get way out in front of it. So many “nerds” were so deeply undervalued, a one-week surge doesn’t close the gap with QQQ. It only serves as a potential first salvo.

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years. 

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