Kim Arthur: Thoughts on Choosing the Right Sector ETF

Includes: XBI, XLV
by: Kim Arthur

As a prelude to our upcoming live discussion on Choosing the Right Sector ETF (this Thursday at 2pm ET), we asked Kim Arthur of Main Management, LLC a few questions:

1. What are the key factors you're looking for when choosing a particular ETF among many available to capture a given sector?

We look at tracking error, embedded fees, underlying index, history of the index, replication versus sampling, caps on the investable index, ability to trade options on the index, assets in the ETF, and specific sub-industry exposure.

2. Can you give an example of two sector ETFs that you considered, and why you chose one over the other?

In the healthcare space, there are many sub-industry specific choices: pharmaceuticals, health care providers, health care equipment, biotechnology, life sciences, and health care technology. For 2009 the broad health care exposure ETF is up on a price basis just under 20%, while the sub-industry price performance ranges from biotechnology (down 5% YTD) to medical devices (up 35% YTD). We were looking for larger cap exposure and higher cash flow companies when we evaluated biotech (NYSEARCA:XBI) and broad exposure healthcare (NYSEARCA:XLV) and chose the XLV.

3. Is ETF selection and portfolio construction something the individual investor can effectively do on their own, or given the complexities and the dynamic nature of this market, do you think it's best left to a professional?

It is possible to do on your own, but one must consider the following: construction of a repeatable process, tactical rebalancing, 800+ ETFs to choose from, bid/ask spreads, market price and NAV differences, and ETF limits in real-world environments (think levered products in a high volatility environment, or negative yield rolls).

4. Where do you get your news and views on ETFs? Are there particular sites or resources that are indispensable in your ETF selection and reference process?

We have a variety of sources including, but not limited to: Index Universe, Seeking Alpha, ETF content providers, Barron’s, WSJ, NYT, Business Week, Morgan Stanley, JP Morgan, Leuthold Weeden, NDR, and BCA.

5. What are your thoughts on the relatively new actively managed ETFs? If an investor is interested in purchasing an actively managed ETF, what are the important elements to look for?

13 funds and $80 million in assets which represents less than 1 basis point of total ETF assets. These types of products already exist. They are called actively managed mutual funds. We are active managers of passively managed investable indexes.