A sector ETF is an exchange traded fund that takes positions in specific sector. These etfs can take positions in various sectors like oil,banking and insurance, healthcare, retail industry. If wisely used, these products can greatly reduce management efforts and costs.
Sector ETF benefits
Sector etfs allow investors to quickly take a position with a certain exposure. Therefore, investors can both save time on management and money on transactions by acquiring a single etf whereas otherwise multiple shares of different companies had to be bought. Moreover, sector etfs still some provide benefits of diversification. Mainly, investors buy or sell a sector etf in case their analysis indicates an over or undervaluation of an entire sector. Bad news on a single company does thus not greatly affect the investment.
Sector ETF downsides
Due to the increased requirements of investors for exposure towards a certain sector, management cost of etf providers are somewhat higher. Moreover, competition for certain sectors can be considerable lower compared to a plain S&P500 etf. As a results, the total expense ratio for this etf type can be considerable higher. A final drawback is that sector etfs are smaller and much less liquid than plain S&P500 etf. In terms of severe market stress, it can become more difficult to close a certain exposure due to low demand and considerably higher spreads.
Sector etfs provide exposure towards a certain industry. These etfs greatly reduce management efforts and transaction costs for small investors. Finally, sector etfs investors still reap the benefits of diversification among companies within a certain industry.