What Is a Sector ETF?

A sector exchange traded fund (ETF) invests in the stocks and securities of a specific industry or sector, typically identified in the fund title. For instance a sector ETF may track a benchmark index for energy stocks or for technology stocks.

Key Takeaways

  • A sector ETF is a an exchange traded fund that tracks a specific industry sector rather than the broad market.
  • Sector ETFs are available for each GICS sector, as well as several ad-hoc and unique sectors that may not be part of the 11 GICS sectors.
  • Sector ETFs can be used to invest in an entire industry without having to piece together the individual stocks in that sector.
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An Introduction To Exchange-Traded Funds (ETFs)

Sector ETFs Explained

Sector ETFs have become popular among investors, can be used 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. Most sector ETFs focus on U.S.-based stocks, but some invest globally to capture the worldwide performance of the sector. Assets are passively managed around an underlying index. Some funds use indexes provided from data services such as S&P and Dow Jones. Leveraged sector ETFs are also available, which aim to achieve double the return of the underlying index, both on advancing and declining trading days.

An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors have to pay the same commission to a broker that they'd pay on any regular order.

GICS Sectors

Sectors typically are considered to be broad classifications. Within each sector, numerous sub-sectors and industries can be further delineated. The Global Industry Classification Standard (GICS) is the primary financial industry standard for defining sector classifications. There are several ETFs that track benchmark indices in these sectors.

GICS was developed by index providers MSCI and Standard and Poor’s. Its hierarchy begins with 11 sectors which can be further delineated to 24 industry groups, 68 industries, and 157 sub-industries. It follows a coding system which assigns a code from each grouping to every company publicly traded in the market. The GICS coding system is integrated throughout the industry allowing for detailed reporting and stock screening through financial technology.

Sector ETF Examples

The 11 broad GICS sectors commonly used for sector breakdown reporting include the following (next to each sector is the ticker symbol for a corresponding sector ETF. More than one ETF exists for each sector):

  • Energy: XLE
  • Materials: XLB
  • Industrials: XLI
  • Consumer Discretionary: XLY
  • Consumer Staples: XLP
  • Health Care: XLV
  • Financials: XLF
  • Information Technology: SMH
  • Telecommunication Services: XTL
  • Utilities: XLU
  • Real Estate: IYR