S&P 500 ETFs Vs Ex-Sector ETFs

The replication of the broader U.S. market – the S&P 500 index (SPY) – may be surging lately on Fed-induced optimism, but on the year-to-date frame it is still a laggard (as of October 15, 2015), having slid about 1.6%.  Relentless global growth worries, be it over China, Europe, Japan or the emerging market block and occasional issues in some specific corners of the domestic market hit the index hard this year.

Even if the market rebounds in the final quarter of the year on hopes of persistent inflows of cheap dollar from the Fed, cheaper valuation and the seasonal tailwind of the all-important holiday season, the odds are not out of the way. After all, the S&P 500 index is made up of large-cap stocks which are largely tied to the global perspective.

This is where the idea of the Ex-Industry S&P 500 ETFs launched by ProShares comes from. As of now, ProShares has four ETFs, namely S&P 500 Ex-Financial ETF (SPXN – ETF report), S&P 500 Ex-Health Care (SPXV – ETF report), S&P 500 Ex-Technology (SPXT – ETF report) and S&P 500 Ex-Energy (SPXE – ETF report). 

As the names suggest, all these ETFs provide exposure to the companies of the S&P 500 with the exception of those companies included in the financial, health care, technology and energy sector, respectively.

How Do These Fit in a Portfolio?

Notably, Financials, Medical, Technology and Energy account for about 20.7%, 13.7%, 20.6% and 4.1% of the S&P 500 index, respectively. So, if a particular sector is underperforming at a given period of time, investors can easily chuck that out from the broader S&P 500 index by investing in that ex-sector ETF (read: 3 Sector ETFs Hit Hard by the Market Sell-off).

What could be a better example than the energy sector, which has been a pain for the last one and a half year in the marketplace and is still not showing any definite sign of a recovery anytime soon? In such a situation, an ex-energy S&P 500 ETF – or SPXE – could an intriguing pick.

The technique is equally gainful even at the time of short-selling. If a sector is outperforming the broader market, investors can easily short sell that particular ex-industry ETF and earn smart gains. The aforementioned sectors outperformed/underperformed the broader market index this year and in previous years as well by a wide margin. The chart below can be used to understand the trend (read: 4 Sector ETFs for Q4):

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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