A Guide to Foreign Sector ETFs

by: SA Editors

Foreign Sector ETFs List
(click on symbol for data and articles)

iShares MSCI Sector Index Funds
iShares MSCI ACWI ex-US Financials Sector Index Fund (NASDAQ:AXFN)
iShares MSCI Emerging Markets Financials Sector Index Fund (NASDAQ:EMFN)
iShares MSCI Europe Financials Sector Index Fund (NASDAQ:EUFN)
iShares MSCI Far East Financials Sector Index Fund (NASDAQ:FEFN)
iShares MSCI Emerging Markets Materials Sector Index Fund (NASDAQ:EMMT)

WisdomTree International Sector Funds
WisdomTree International Basic Materials Sector Fund (DBN)
WisdomTree International Communications Sector Fund (DGG)
WisdomTree International Consumer Cyclical Sector Fund (DPC)
WisdomTree International Consumer Non-Cyclical Fund (DPN)
WisdomTree International Energy Sector Fund (DKA)
WisdomTree International Financial Sector Fund (DRF)
WisdomTree International Health Care Sector Fund (DBR)
WisdomTree International Industrial Sector (DDI)
WisdomTree International Technology Sector Fund (DBT)
WisdomTree International Utilities Sector Fund (NYSEARCA:DBU)

What Are They?

  • Foreign Sector ETFs provide exposure to non-US stocks by sector. They differ from global sector ETFs which cover both US and foreign stocks.
  • These sector ETFs are generally market-cap weighted, meaning that larger companies have greater representation in the index, and if a stock's price rises fast, its weighting in the index rises.

Why & How To Use Them

  • There are three ways to use sector ETFs: (1) for short term trading, (2) to overweight one or a couple of sectors in a long term portfolio by adding a single sector ETF to a portfolio of broader ETFs, or (3) as the basic building blocks of a long term portfolio.
  • The argument for using international and US sector ETFs as the basic building blocks of a portfolio is that doing so makes your portfolio more granular, providing more rebalancing opportunities.
  • Sector ETFs are attractive to short term traders and momentum investors, as there are dramatic differences in the performance of individual sectors in most years.

What to Look Out For

  • Foreign sector ETFs provide varying degrees of exposure to currency movements, and it's not always easy to assess that exposure. The dollar value of foreign stocks is directly impacted by currency movements -- after all, they're priced in a foreign currency. But currency movements also impact sector earnings depending on how export oriented the sector is and the degree to which its costs are priced in foreign currency, and earnings can impact stock prices.
  • Compared to broader index ETFs, sector ETFs tend to have higher expense ratios and wider buy-sell spreads (which makes them more costly to purchase and sell).
  • Market-cap weighted sector ETFs tend to be dominated by large cap stocks, so they don't provide much exposure to small cap stocks. The dominance of large cap stocks also leads to concentration, making them generally more volatile than broader index ETFs.

Further Reading

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.

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