|By Nathan Young|
Previously in the ETF article series, we have talked about two of the larger ETF’s that focus on index tracking. Those are the ticker SPY and QQQ, but now we dive a little bit deeper and take a look at sector exchange traded funds. Sectors that many of us are familiar with include financials, telecommunications, and discretionary spending. Certainly there are more but these are just a few. For this instance, we are going to look at the financial sector using the SPDR fund product, XLF. The ticker XLF is a popular and widely used ETF that tracks the financials sector.
Names that are in the financials space include Wells Fargo, JP Morgan, and Citigroup. Analyzing a sector ETF takes a different spin from analyzing an index ETF. Typically in an index ETF, you want to look at the holdings to analyze how much weight they may or may not have towards certain companies or sectors. With a sector specific product, you want to analyze the companies that are in it.
For example, with XLF, as of October 5th the top holding was Berkshire Hathaway Inc. Class B. This by itself may not have much significance unless you dislike Berkshire Hathaway. The significance comes into play when you compare the holdings against the index holdings. You want the numbers to be very similar because the goal is to track the index step for step. Looking at the beta of the ETF should give you solid indication on how it tracks.
When looking at sector specific ETF products, you begin to get into the territory of less liquid products and some smaller funds with low assets under management. This does not necessarily mean that the product is in danger of closing, but you have to understand what the ETF’s goal is specifically and that will tell you how to utilize it. XLF is a solid product that is highly traded, removing the risk of liquidity almost one hundred percent.
Financials are a very cyclical sector and are sensitive to many local and global factors. Understand what those factors are and learn how to integrate it into your analysis of potential investments. Another benefit of a sector ETF is you can gain exposure to a sector while limiting the company specific risk. If Wells Fargo suddenly closes their doors, the ETF will be negatively impacted but it is better than holding Wells Fargo stock on its own.
XLF and other sector exchange traded funds are a very useful way to diversify your portfolio and capture swing in certain market sectors. In the next article of the ETF series, we’ll take a look at the retail space and how an ETF could limit company specific risk while allowing you to potentially profit on the rebound.
|This article from Macroaxis published on 06 of October contributed to the next trading period closing price depreciation.The trading price change to the next next day price was 0.38% . The overall trading delta when the story was published to current price is 6.98% .|