Investing in sector ETFs

What does it mean to invest in a sector of the sharemarket?

A sector is used to describe a group of companies in the market that provide similar products or services.

With over 2,000 companies listed on the ASX, categorising companies by sectors enables investors to look at the sharemarket as a whole and compare businesses based on their sector or industry.

The Global Industry Classification Standard (GICS), jointly established by global index providers S&P Dow Jones Indices and MSCI, is the global standard for categorising companies into sectors and industries.

GICS categorises stocks into 11 sectors and 24 industry groups, 68 industries and 157 sub-industries.

GICS sectors:

• Communication Services
• Consumer Discretionary
• Consumer Staples
• Energy
• Financials
• Health Care
• Industrials
• Information Technology
• Materials
• Real Estate
• Utilities

What is a sector ETF?

A sector exchange traded fund (ETF) aims to track a benchmark index for a particular sector or industry, for example, financial services, technology, or energy.

As an example, the BetaShares Global Gold Miners ETF – Currency Hedged (ASX: MNRS) aims to track the performance of an index (before fees and expenses) that comprises the largest global gold mining companies (ex-Australia).

There’s also the BetaShares Australian Financials Sector ETF (ASX: QFN) which aims to track the performance of an index (before fees and expenses) comprising the largest ASX-listed companies in the financial sector, including the ‘Big 4’ banks and insurance companies but excluding Real Estate Investment Trusts.

Why invest in a sector ETF?

Sector ETFs offer investors a simple way to access particular areas of the global or local economy.

In addition, ETFs can help to achieve diversified exposure to a sector without taking on significant stock-specific risk, because the fund invests in a portfolio of companies operating in a particular sector or industry within one trade.

What is a thematic ETF?

Thematic investors try to identify long-term transformational trends, and the investments that are likely to benefit if those trends play out. These themes tend to be one-off shifts that irreversibly change the world, driven by powerful forces such as disruptive technologies or changing demographics and consumer behaviour.

Thematic ETFs are ETFs that select underlying holdings based on their exposure to these particular investment themes or ideas. They are typically agnostic to industry sectors and geographical boundaries, unlike sector ETFs, which invest according to traditional or pre-defined industries or sectors.

One example of structural change is the emergence of e-commerce, which has fundamentally shifted the way goods and services are bought and sold. Another example of an investment theme is the rise of cybersecurity, which is increasingly becoming a critical threshold component of all technology solutions as more and more of our world goes online.

How do investors use thematic ETFs or sector ETFs in their portfolios?

While thematic ETFs differ from sector ETFs, the reason investors are attracted to them is typically the same – to gain exposure to a particular area of the market (categorised by a theme or sector).

Such investors may be looking to obtain exposure to a portfolio of companies within the specified theme or sector, rather than (for example) trying to identify a specific company that may become the future leader in the space. Thematic or sector ETFs are a convenient and cost-effective way to do this.

Typically, investors use thematic or sector ETFs to gain targeted or tactical exposure, and to complement their core or foundation portfolio allocations.