Similar Sector ETFs Not Built The Same

June 15, 2017

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

Not sure what to order at a new restaurant? While some may choose a couple of dishes that look familiar, others prefer ordering off a tasting menu. Similarly, investors and advisors increasingly use sector and industry ETFs as a replacement for individual stock positions.

According to State Street Global Advisors (SSGA), investors put $15 billion into sector ETFs through the first five months of 2017.

While the S&P 1500 Index was up 8.2% year-to-date through June 9, the gap between the best- and worst-performing sectors this year is wide. Gains of 18% for information technology and 13% for health care help mask the 13% and 9.5% losses for energy and telecom services, respectively, in a portfolio holding stakes in all 11 Global Industry Classification Standard (GICS) sectors.

By focusing on getting the sector calls correct, an investor can find performance success.

Pioneer Of Sector ETFs

SSGA pioneered sector ETF investing 19 years ago with the launching of then-nine Sector SPDR products, including the Financial Select Sector Fund (XLF) and the Health Care Select Sector SPDR (XLV). These products only hold S&P 500 constituents and are market-cap-weighted.

For example, Johnson & Johnson and J.P. Morgan Chase are heavyweights in XLV and XLF, respectively. Since then, SSGA added approximately two dozen industry-focused and typically equally weighted products, including the SPDR S&P Regional Banking ETF (KRE) and the SPDR S&P Biotech ETF (XBI), and a tenth Sector SPDR with the addition of a real estate product, the Real Estate Select Sector SPDR Fund (XLRE).

In ranking approximately 1,000 equity ETFs, CFRA leverages our qualitative stock research capabilities. Each ETF is ranked based in part by what CFRA thinks of the holdings inside from a forward-looking valuation and risk perspective rather than relying solely on past-performance metrics.

Sector ETF Assets

Relative to other large asset managers, SSGA’s asset base is more dependent on sector products, with approximately 25% of assets under management tied to these sector/industry offerings, according to our research. SSGA is the third-largest ETF provider.

Meanwhile, the second-largest provider, Vanguard offers just 11 sector/industry ETFs, but the firm has approximately 11% of total assets in these products. The Vanguard REIT ETF (VNQ), a $34 billion offering, is the largest, but the remaining 10 each have $1 billion or more in assets. Examples include the Vanguard Health Care ETF (VHT) and the Vanguard Financials ETF (VFH).

While VHT has a lower net expense ratio than XLV (0.10% vs. 0.14%), the 68 basis point performance differential in 2017, as of June 12, stems more from holdings differences. Vanguard’s sector products include some small- and midcap stocks outside of the S&P 500 Index and, as such, VHT has more biotech and less pharmaceutical exposure.


Popular Sector ETFs Offer Different Industry Exposure

Source: CFRA’s MarketScope Advisor


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