What Are They?
- These ETFs cover the energy sector, namely companies involved in the discovery, extraction and production of energy, including alternative energy. Oil and gas are commodities and are listed separately under Commodity ETFs and ETNs.
- Sector ETFs come in four levels of granularity: (1) global, (2) US or international, (3) the main industry sub-groups that comprise the sector, and (4) narrower groups of companies within the sector.
- Specialty ETFs are also available for the energy sector, including leveraged, inverse, quant strategy, fundamental index and equal weighted ETFs. These ETFs are explained in their own sections of the ETF Finder; you can find the relevant links in Further Reading below. They usually use the primary US sector index.
Why & How To Use Them
- Sectors go in and out of style but tend to trend upwards at the same rate, so rebalancing between sectors can provide attractive opportunities. Long term investors may therefore want to build a diversified portfolio with enough granularity to provide opportunities for rebalancing using one of the sector ETF families listed in Primary US Sector ETFs or Global Sector ETFs. For more on rebalancing, see Further Reading below.
- If you believe that a particular sector will outperform, for example due to population aging or energy shortages, even as a long term investor you may want to overweight that sector. There are two ways to do that: (1) Assemple a diversified portfolio of broad ETFs (such as a total US market ETF, a broad foreign stock ETF and a broad bond ETF), and then add one or more of the ETFs on this page to increase exposure to this sector. (2) Build your portfolio using US sector ETFs or global sector ETFs and overweight one sector.
- Sector ETFs are popular with short term traders and momentum investors.
What to Look Out For
- Sector ETFs tend to be more concentrated than broad index ETFs. That means they can be more volatile, and can involve greater long term risk if the largest stocks in the ETF performs poorly.
- Sector ETFs tend to have higher expense ratios than broader index ETFs.
- Merrill Lynch HOLDRs are fixed baskets of stocks that become less and less representative of their sectors over time. The Internet HOLDRs ETF, for example, doesn't include Google.
- Articles on specific ETFs in this list: Claymore's New Canadian Energy ETF Blurs the Line Between Active/Passive Investing (Matt Hougan), Claymore's New Oil-Sands ETF (Roger Nusbaum), The World's First All-BS ETF (Greg Newton), Bear Stearns' New MLP ETN - Seeking Insight (Roger Nusbaum).
- Read more about alternative energy ETFs and oil and gas commodity ETFs.
- Narrow theme ETFs tend to have higher expenses and spreads than broader index ETFs. See Matt Hougan's Watch Expenses & Spreads For HealthShares, PowerShares, WisdomTree ETFs.
- It's generally agreed that expenses have a significant impact on long-run returns. However, Michael Krause argues that ETF Fees Are Largely Irrelevant and Roger Nusbaum agrees.
- Rebalancing is discussed in How to Make Money By Rebalancing and Rebalancing Rules. The case for and against sector ETFs for long term investors is outlined in Should You Use Sector ETFs?.
- For examples of sector-oriented commentary for short term traders and momentum investors, see articles by David Fry and Nick Perry.
- Read more about equal weight ETFs, fundamental sector ETFs, quant strategy ETFs, leveraged ETFs and inverse ETFs.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.