We recently came across a problem for a client that might be similar to something other investors, especially those who like to use ETFs or mutual funds as opposed to individual stocks, have encountered. One of the clients has a job that prevents them from directly investing in a significant list of individual stocks. Included in the list of proscribed stocks are many fast-growing, highly profitable technology companies with great economic moats and high returns on capital. Since we couldn’t include some companies directly, we decided a technology-centric ETF was the next best choice. The question was, which ETF would give our client the best exposure to the types of companies we wanted in our portfolio?
S&P Technology Sector Fund?
At first you might think that this article is rather pointless. The S&P 500 already has a technology sector so just include a fund based on that such as the SPDR Technology Sector ETF (NYSEARCA:XLK). Well, take a look at the fund's top holdings.
There are some big problems. Amazon (NASDAQ:AMZN) isn’t included in the sector. We also have almost 7% of the fund in telecommunications stocks via AT&T (NYSE:T) and Verizon (NYSE:VZ). Not only that, other attractive, fast-growing, high return-on-capital companies like Booking Holdings (NASDAQ:BKNG) and video game publishers are not part of the sector. Instead, those companies and Amazon are part of the consumer discretionary sector.
S&P Consumer Discretionary Fund?
We could just invest in a consumer discretionary sector fund as well such as the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY). Here are that fund's top holdings.
If we included this, we’d get our allocation to stocks like Amazon, Booking Holdings and other technology-type stocks such as video game publishers. However, we would also get substantial allocations to various media, retailers, and consumer goods-type stocks.
