5 Sector ETF Picks For Every Portfolio

As index providers continue to innovate, the toolkit of ETFs expands, segmenting major asset classes for more concentrated and granular exposure. This rapid expansion over the past decade in particular has seen the development of products that offer targeted exposure to specific sectors, ranging from property to sustainable energy.

Rather than simply offer a way for investors to gain access to a particular area, ETFs can also screen out sectors, such as banks, allowing investors to take a view on a market while removing an area to which they are averse.

Getting A Handle On Property

Anna Sofat, founder of wealth manager Addidi, tips the iShares UK Property UCITS ETF (IUKP).

“Traditionally, there are dividend-oriented property funds, with an interesting exposure to rental yield for income stream,” she said. “But I’m looking to invest without having to hold physical property, because after 2008, these funds were highly illiquid.”

Sofat said the fund tracks an index that tracks the returns of residential and commercial property, in order to gain diversification and yield. “ETFs are low-cost and highly liquid”, she added.

The fund, which has £867.5 million of assets, physically replicates the underlying benchmark, with a total expense ratio of 0.40 percent. Top holdings include the Land Securities Group real estate investment trust, British Land Companies, and the Hammerson real estate investment trust.

Over three years, the fund has returned 22.3 percent, compared with the index’s 22.7 percent.

Environmentally Friendly

Another theme Sofat invests in on behalf of her clients is sustainability, ranging from corporate governance to environmental impact. She points to the iShares Dow Jones Global Sustainability Screened UCITS ETF (IGSG) as an efficient way to gain access to this sector.

“ETFs are now coming into this space, and there is a need [for these funds] from my clients’ perspective,” she said. “There are a number of criteria that you can screen for – corporate diversity at senior levels, strong corporate governance, and minimum wage, for example”.

The fund, which has a total expense ratio of 0.60 percent, physically invests in a representative sample of stocks from an index that screens out exposure to alcohol, tobacco, gambling, armaments and firearms, and adult entertainment. Top holdings in the index include Microsoft, Novartis, Johnson & Johnson and JPMorgan Chase.

Over three years, the fund has returned 11.8 percent, versus the index’s 12.2 percent.

Seeking Income

Peter Sleep, a senior portfolio manager at Seven Investment Management, recommends the SPDR UK Dividend Aristocrat UCITS ETF (SPYG) as it selects the 30 highest paying UK stocks with an unbroken 10-year history of steady or increasing dividends.

“This gives it an interesting bias to stable and steadily growing companies away from the more volatile and cyclical end of the market,” he said.

“Performance since its launch in June 2012 has been good, beating the FTSE 100 by 9.2 percent and the dividend yield is a very respectable 4.2 percent.”

The fund, which has a total expense ratio of 0.30 percent and is £78 million in size, physically replicates the underlying index. It has returned 40.8 percent over three years, compared with the index’s 42.7 percent.

Banking On Financials?

Sleep also tips the Source European Banks Sector UCITS ETF (X7PS) although cautions that it is not for the faint-hearted.

“European banks have been beaten up over the last seven or eight years and are beginning to look cheap,” he said. “They have been forced to cut back on risky lending, build up their capital reserves and been put through the ringer of the European Central Bank stress tests.”

“A rebound in profits may see their shares start to do well,” he added.

The fund physically invests in the index’s shares, but uses a swap overlay to minimise tracking error. The ETF’s largest holdings comprise Banco Santander, HSBC and UBS.

The ETF has a 0.30 percent total expense ratio, and houses €108.3 million of assets. Year to date, the fund has returned 21.2 percent, compared with the index’s 21.4 percent.

For Ben Seager-Scott, a director at Tilney Bestinvest, the converse is true, as he opts for the iShares Euro Stoxx 50 ex Financials UCITS ETF (EXFN) which excludes such banking stocks.

“As the ETF universe matures, there are more products that really let investors fine-tune their portfolio,” he said.

“There are areas where investors may simply wish to avoid, and the financials sector – rightly or wrongly – is a common one,” he said. “This ETF gives exposure to the broad Eurozone but without exposure to financials stocks, such as the large investment banks, which tend to be volatile.”

The fund, which has a total expense ratio of 0.20 percent, physically replicates the index, and is €51.7 million in size. Since inception at the end of 2013, it has returned 17.3 percent compared with the index’s 16.7 percent.