Analyzing Claymore's New Super Sector ETFs

Claymore Securities has launched another three ETFs, bringing its total ETF line-up to 35 funds.

The new ETFs cover three sector indexes from Morningstar ...  or should I say, super sectors. Rather than dividing the market into ten industry-focused "sectors," as most classification systems do, Morningstar splits the market into just three buckets: Service, Manufacturing and Information. 

"The Morningstar Super Sector Indexes offer investors a different way of looking at the market," Sanjay Arya, director of Morningstar Indexes, says. "This intuitive, consumption-based organization of sectors mimics the way economies evolve from dependence on the production of physical products to the delivery of services, which culminates with the exchange of information."

He points out that Morningstar uses it sector classification system in its research and analysis activities, and that it has incorporated the structure into some of its products, like Portfolio X-Ray. The indexes were not created just to serve as the bases for products but to be used as tools, he says.

Of the three Super Sectors, Manufacturing has the best year-to-date performance, up 11.60% as of August 22. Its performance was mainly driven by the energy and industrial materials companies; it also includes consumer goods and utility companies. The index included 648 companies as of the end of July, with the top 10 comprising nearly 35% of its total market capitalization. At the time it also had a PE ratio of 15.58 and a PB ratio of 3.13. It represented about 35% of the total market capitalization of the broad U.S. market at the end of the first half of 2007.

The Information Super Sector was the second-best performer, up 6.69% through August 22. At the end of July the index had 342 companies, and the top 10 represented almost 46% of the index. It had a much higher PE ratio at 23.13 and a similar PB ratio of 3.06. It covers software, hardware, media and telecommunications companies. It is the smallest of the three sectors at about 21% of the broad U.S. market as of June 30.

The worst-performing of the three Super Sectors was Service, down 0.66%. Its PE ratio as of the end of July was 15.77, while its PB ratio was the lowest of the three at 2.40. However, the index is more diversified than the other two: It had 1,017 components, and the top 10 represented just 22.24% of the total market capitalization. It includes business services, financial services, consumer services and healthcare companies. The Service Super Sector represented roughly 44% of the total U.S. index at the end of June.

	Manufacturing	Information	Services
Ticker	MZG	MZN	MZO
YTD Performance	11.60%	6.69%	(0.66%)
P/E Ratio	15.58	23.13	15.77
P/B Ratio	3.13	3.06	2.40
Components	648	342	1,017
Top 10 Concentration	35%	46%	22.24%
% Of Total U.S. Market	35%	21%	44%
Includes	Energy Industrial Materials Consumer Goods Utilities	Software Hardware Media Telecommunications	Business Services Financial Services Consumer Services Healthcare

 

"In the long run, I think Information is going to get bigger," Arya says, adding that he thinks there will probably be some shrinkage in Manufacturing. However, he emphasizes that he believes all three sectors will remain important.

"I think at some point there will be some sort of equilibrium between the three," he says.

Will investors use these products? At first glance, it's a challenging assignment. Investors aren't yet familiar with the Super Sector concept, and may not know how to position the funds within an asset allocation strategy.

Still, it is not much different from using three size segments to focus on different parts of the market. The trend in sector investing has been toward increased granularity rather than breadth, and it seems likely that is where the greater demand lies. However, with increased granularity comes increased risk. For conservative investors looking to incorporate a sector-based investment strategy but who want to make broader and more diversified sector bets or for those who do not want to keep track of 10 different funds when they could just use three, the Claymore/Morningstar Super Sector ETFs could be useful products.

"Investors recognize that sector diversification is important, but the sheer number of sectors may make it difficult for them to track and allocate their holdings across industries," Claymore Senior Managing Director Christian Magoon said in a press release.

Arya echoes this belief, pointing out that Morningstar's three Super Sectors represent fewer moving parts for an investor doing sector allocation.

"We think this is slightly contrarian to the trend in the [ETF] industry," he says, noting that ETFs are looking at more and more narrow slivers of the market and holding highly concentrated portfolios with higher risk levels. Using the Super Sector indexes, Arya says investors can gradually tilt their portfolios more easily.

The Claymore/Morningstar Information Super Sector Index ETF (MZN), the Claymore/Morningstar Service Super Sector Index ETF (MZO) and the Claymore/Morningstar Manufacturing Super Sector Index ETF (MZG) each trade on the NYSE Arca exchange and carry expense ratios of 0.40%. The expense ratios are less than those for BGI's U.S. sector ETFs based on the Dow Jones indexes (0.48%), but more than those for the State Street's Select Sector SPDRs (0.24%), based on the S&P indexes.

The prospectus is available here.

 

Comments

[helsi:]

Wow! Thanks for this info. Will follow closely....great concept.

2007 Aug 28 11:39 PM