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Proprietary Data Insights Top Sector-Specific ETF Searches This Month
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Continuing our back-to-basics approach for Q1 2023, today, The Juice takes another look at ETF investing. Earlier this month, we focused on creating a well-rounded portfolio of tech stocks and dividend stocks using exchange-traded funds (ETFs). Note we used the word well-rounded, not diversified. This is because you really can’t spread your money out over several tech and dividend ETFs and call that diversification. You might be diversified – or close to it – within the tech sector or within the investment style known as dividend growth investing, but this isn’t broad diversification. In fact, true diversification across your entire portfolio is incredibly difficult to achieve. True diversification happens when you own investments in the right mix of sectors (e.g., tech, retail) and asset classes (e.g., stocks, bonds, cash, and maybe alternative investments like real estate, crypto, and private equity). With that disclaimer out of the way, our focus today is diversification in stocks using ETFs. Because it’s pretty damn hard to run around buying individual stocks if your goal is a diversified stock portfolio. It’s a lot easier to let ETFs do the stock picking and some of the work for you. |
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ETF Investing |
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All You Need Is Love and a Few ETFs |
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Key Takeaways:
Start Broad If you had money to buy only two ETFs, you’d probably be wise to keep it simple and go with the SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500 stocks, and the Invesco QQQ Trust Series 1 (QQQ), which mimics the returns of the biggest companies trading on the Nasdaq. While allocations can change, generally you’ll have plenty of exposure to Apple (AAPL), Microsoft (MSFT), and Amazon.com (AMZN) with both ETFs. You’ll also have broad sector exposure with Johnson & Johnson (JNJ), Exxon Mobil (XOM), and JPMorgan Chase (JPM) among the top holdings in SPY and Tesla (TSLA) and PepsiCo (PEP) in QQQ. Both SPY and QQQ are passive ETFs that, like many ETFs, simply track broad-market indices. Get More Specific Just because you’re letting ETFs pick stocks for you doesn’t mean you don’t have choices to make. Once you go beyond broad-market-tracking ETFs, you get into sector-specific ETFs. It’s next to impossible to own an ETF in every sector. And you probably wouldn’t want to anyway. What follows is an example of one way to do it. First, buy consumer ETFs. We’d pick up a consumer discretionary ETF and a consumer staples ETF. The former owns companies that sell nonessential goods and services, while the latter owns names that sell essential goods and services. The Consumer Discretionary Select Sector SPDR Fund (XLY) tracks the performance of an index that covers the consumer discretionary part of the S&P 500. With XLY, you’ll get exposure to stocks such as Amazon and Tesla (together comprising roughly 38% of the ETF’s holdings), but also Home Depot (HD), McDonald’s (MCD), Starbucks (SBUX), and Target (TGT). The iShares U.S. Consumer Staples ETF (IYK) tracks the Russell 1000 Consumer Staples Index of large-cap consumer staples stocks. With IYK, you’ll own Procter & Gamble (PG), PepsiCo, and Coca-Cola (KO) (together accounting for about 38% of the ETF’s holdings), along with CVS Health (CVS), Mondelez Intl (MDLZ) and McKesson (MCK). There’s already some diversification in the names we’ve listed across two broad-market ETFs and two sector-specific ones. From here, you can pick additional sectors where you’d like exposure, such as real estate and energy. Within each sector, you can get more specific. For example, our sister newsletter, The Spill, recently gave an 8/10 rating to a homebuilder ETF. Within energy ETFs, you can go global or country-specific, or buy ETFs that own only clean energy stocks or only oil miners or oil services companies. You can go even finer-grain and buy ETFs that invest in stocks of companies in only the food and beverage or airline spaces. If you like or want exposure to a particular country, throw a dart at the map, and there will be an ETF that invests only in stocks of that country. Another topic for another day: actively managed ETFs, where fund managers pick stocks rather than investing passively to mimic the returns of an index. The possibilities are endless. All it takes is a Google search to find free access to more research than you’ll be able to get through on ETFs across sectors of interest that can help put you on the road to diversification.
The Bottom Line: You really have to love investing to do the research necessary to even attempt to diversify your portfolio. This is why people hire money managers. While there’s nothing wrong with that approach, the information exists for a do-it-yourself investor to find ETFs that will help create a solid portfolio foundation. Of course, you can also go with a blend of DIY and professional help. Any way you slice it, you’ll have a much easier and potentially more successful go at it if you use ETFs for exposure to stocks rather than picking individual stocks. |
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