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iShares has released an interesting overview of how the individual stocks in the Dow Jones U.S. Technology Sector ETF (IYW) basket have done on a risk/reward basis relative to the exchange-traded fund over the three years ending 12/31/07. It also highlights IYW's top ten holdings.

The iShares graph (.PDF) indicates that IYW represented less risk than all of the ten top weighted stocks and that it had an higher average annualized return than all but three of its top ten individual companies; Apple, Google and Hewlett-Packard.

This is a powerful example of the utility of sector ETF investing. iShares also has ETFs for the ten global sectors that make up the S&P Global 1200 representing 70% of world equity markets. Chartwell Partners uses these ten global sector ETFs to manage its Global Sector Rotation ETFfolio.

As economies and companies around the world become more interdependent, investors and advisors need to adapt their strategies to add value and increase the likelihood that they will outperform benchmarks. Where a company is domiciled is becoming less important, what industries and sectors it operates in is becoming more important.

Research shows that since the late 1990s, the importance of developed country factors as a factor in determining relative returns is declining and sector factors are increasing. For example, global sectors account for roughly 40% of total global equity return dispersion up from 15% in 1992.

Source: iShares US Tech Sector ETF vs. Stock Picking