The 15 Most Important ETFs

October 06, 2015

XLK: Technology Select Sector SPDR

The idea of sector investing is so entrenched in the market today that it's hard to imagine that, as recently as the late 1990s, it was virtually impossible to do.

But Dan Dolan, one of the creators of the $95 billion Select Sector SPDRs family, remembers.

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"[In the late 1990s] Chuck Clough was our well-respected chief investment strategist at Merrill Lynch," Dan recalled. "He was there more than 10 years and had a huge following. He had a sector-based model where he would over- and underweight sectors and talk about what he liked and didn't. The advisors loved him, but he had a hard time implementing his strategy."

Enter the Select Sector SPDRs. The ETFs, which launched in 1998, divided the S&P 500 into nine distinct sectors, allowing Merrill Lynch advisors (and everyone else in the market) the opportunity to slice, dice, over- and underweight sectors however they wanted.

Beyond model usage, Dolan says, they expected advisors to use the funds to customize the S&P 500 and institutions to trade sectors long and short. And use them they did.

"At the time of the launch, having a $1 billion ETF trust was huge," noted Dolan. "We were able to raise $500 million even before our nine ETFs started trading. We thought Sector SPDRs could one day be a $10 billion family."

Today they stand a little north of $95 billion in assets, and have sparked a wave of more than 400 competing sector, subsector, industry and niche ETFs.

From the beginning, however, technology was hot.

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"In the late 1990s when we launched, technology was the star, and we knew the Technology Select Sector SPDR (XLK | A-89) would generate huge demand; it was half the trust assets for the first few years," Dolan added.

Today XLK is the third-largest Select Sector SPDR, trailing the $17.8 billion Financial Select SPDR (XLF | A-89) and the $14 billion Health Care Select SPDR (XLV | A-94).

For investors of all stripes, sector investing has become another tool that ETFs have provided in an easy, inexpensive manner. XLK, to us, is the epitome of how the market can be sliced in a passive vehicle.

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