New Twist On Sector ETF Investing

November 12, 2015

[This interview originally appeared in our November issue of ETF Report.]

Last month, ProShares, the ETF provider behind various widely known alternative strategies, launched four S&P 500 ETFs, but each excludes an individual sector. The funds are: S&P 500 Ex-Energy ETF (SPXE); S&P 500 Ex-Financial ETF (SPXN); S&P 500 Ex-Health Care ETF (SPXV); and S&P 500 Ex-Technology ETF (SPXT). The funds are a new twist on sector investing. The idea is that investors might want broad exposure to the S&P 500 but would like to underweight a specific sector they don’t want. ETF Report sat down with Michael Sapir, chief executive officer of ProShares Advisors, to discuss the funds and the idea behind them.

This is a pretty simple concept: stripping out a sector from the nine S&P 500 sectors. You’ve launched four, but I presume you’ll eventually roll out a product lineup that strips out all nine sectors.
We respond to demand from advisors and others. If we perceive that there is demand there, we will entertain more products.

What’s the motivation behind this? Was there actual demand for it in that regard?
This product set came into being like you’ve seen many successful ETFs come into being. We’ve taken a strategy that has been used by institutional investors for a long time; namely, buying a segment of the market or an index, leaving out a sector. And we’ve taken that strategy and we’ve formed an ETF around it to make it simple and obtainable by retail investors. We’ve gotten very positive feedback from the advisor community who have indicated numerous ways they thought they could use a strategy like this.

Could you give me an example of how they would use this strategy?
These do what many successful ETFs do, which is take something that may be complicated or difficult to implement and deliver it through one ETF. These products turn sector funds on their head. Typically, an investor would take or buy a sector fund in order to overweight that particular sector in their portfolio. What these ETFs allow you to do is have further control over the exposure you have in your portfolio by allowing you to underweight a sector. So advisors have told us they might use the product, the strategies in a variety of ways.

First, they’ve indicated that they would be using the strategy to underweight a part of the market that they don’t feel good about—just like they would overweight a part of the market that they felt good about. Before these products came along, you would have to buy the S&P 500 and you had to take everything that came with it, whether you believed in all the sectors or not.

For instance, if you felt there was a secular bear market in energy, and that it would continue, but you still wanted the S&P 500, you had no choice but to take the whole thing. Now you can say, “You know what? I want to underweight the energy sector in my client’s port-folio” And this gives you the opportunity to leave energy behind when you buy the S&P 500.

Is this is a cheaper way to do sector rotation?
Well, it’s an easier, convenient way of getting to the result of buying eight out of the nine sectors. If you did that, you’d have to buy the eight different sector ETFs and pay a commission for each of those purchases. And then you would have to rebalance the sectors if you were looking to keep the same weighting that they have in the S&P 500.

Like other ETFs have made accessible a lot of strategies that you could otherwise implement yourself, but were inconvenient or difficult or expensive to implement yourself, so do these funds.

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