Reviewed by Sep 28, 2020| Updated on
What is a Sector ETF?
A sector exchange-traded fund (ETF) invests in a given industry or sector's stocks and shares, usually listed in the fund title. A sector ETF, for example, can follow a benchmark index for energy stocks or stocks of technology.
Sector ETFs have become popular with investors and can be used to hedge and speculate. Their high liquidity level means that there are rarely any significant monitoring errors, even during intraday trading, from the underlying index.
Sector ETFs Explained
An ETF is a marketable investment that tracks an index, commodity, bond, or asset portfolio, such as an index fund. Like mutual funds, an ETF is traded on a stock exchange like a common stock. ETFs undergo price changes as they are bought and sold throughout the day.
ETFs have higher daily liquidity and lower fees than shareholdings in mutual funds, making them an attractive alternative for individual investors.
In buying an ETF, investors get an index fund's diversification, as well as the ability to sell short. Also, investors can buy on margin or buy as little as one share.
Another advantage is that most ETFs have lower expense ratios than those of the average mutual fund. Investors must pay the same fee to a broker when buying and selling ETFs which they would pay on any regular order.
Usually, the sectors are specific classifications. There are various subsectors and industries that can be delineated further within each market. The Global Industry Classification Standard (GICS) is the global standard for identifying classifications of the business in the financial industry. There are several ETFs in these sectors which follow the benchmark indices.
Index providers, such as MSCI and Standard and Poor's, developed the GICS. The hierarchy of GICS begins with 11 sectors. They can be further delineated to 24 industry groups, 68 industries, and 157 sub-industries.
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