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DEFINITION of 'Sector ETF'

A class of exchange-traded fund that invests in the stocks and securities of a specific sector, typically identified in the fund title. Most sector ETFs focus on U.S.-based stocks, but several will invest globally in an attempt to capture the worldwide performance of the given sector. Assets will be passively managed around an underlying index; several use indexes provided from data services like S&P and Dow Jones. Leveraged sector ETFs are also available, which aim to achieve double the return of the underling index, both on advancing and declining trading days.

BREAKING DOWN 'Sector ETF'

Sector ETFs have become very popular among investors, as they can be used to plug holes in otherwise diversified portfolios, or simply for hedging and speculating. Their high level of liquidity means that there are rarely any large tracking errors from the underlying index, even during intraday trading.

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