Sector ETFs have gained a lot of visibility recently. If you are a mutual fund investor, chances are you have heard about sector ETFs already. It is an explainer that discusses sector ETFs and why you should invest in them.

As the name suggests, sector ETFs allow investors to invest in sectors like pharma, IT, banking, and finance, usually mentioned in the fund’s name. Like mutual funds, sector ETF invests a pooled corpus into stocks of a specific sector. For instance, a sector ETF may track an index of technology and pharmaceutical stocks.

Investors use sector ETFs for hedging and speculation. Like typical ETF funds, these are highly liquid, reducing chances for significant tracking errors from the underlying price change even during intraday trading.    

Understanding sector ETFs

Sector ETFs are marketable investments that track commodities, bonds, or asset portfolios like an index fund. However, unlike index funds, ETFs are listed in the stock exchange, and their interday prices change with the fluctuation in the value of the stocks they follow. It makes ETF funds more liquid than others. Moreover, investing sector ETFs allow instant fund diversification with more exposure to industries performing well. Besides, ETFs are passively managed funds with lower investment expenses than actively managed mutual funds, making these an attractive investment option. However, investors will still have to pay transaction commissions while buying or selling units.

Most sector ETFs invest in domestic stocks, but some also offer exposure to foreign companies. Sector ETFs give retail investors sector exposure through a diversified portfolio.

ETFs are less volatile and considered safer as an investment tool since they follow an index that offers a high transparency level.

GICS sector

Sector ETFs usually provide broad diversification in a sector and numerous sub-sectors. Investors, analysts, and economists use the Global Industry Classification Standard (GICS) to define sector classification as the primary financial industry-standard metric. It is a method to assign each company to a specific sector. Index providers such as MSCI and Standard and Poor’s collectively have designed GICS. The hierarchy of GICS begins with 11 sectors and is delineated further into 24 industry groups, 68 industries, and 157 sub-industries. 

Conclusion

Sector ETFs are an excellent option for portfolio diversification. Besides, these allow investing in growing sectors with the best chances to increase returns on the portfolio.