ETFs Have Appeal For Sector Investors

4/20/2009


A glance at our Buy List will show you that we favor two sectors — health care and technology.

If you’re a fan of health care and technology — and typically buy individual stocks — turn to page 7 for a list of our top picks.

However, for many investors, an exchange-traded fund (ETF) holding a basket of stocks offers a simpler way to target a particular sector. ETFs have gained fans because the funds are easy to trade and generally offer decent diversification. In addition, relative to traditional mutual funds, ETFs often provide better tax efficiency and lower expense ratios.

Sector ETFs also carry some inherent baggage. Because of their narrow focus, the funds can be quite volatile. And some funds are surprisingly concentrated in just a few stocks, exacerbating that innate volatility.

HIGH-SCORING ETFs
Quadrix Overall
———— Score * ————
– % of Assets –
Total
—— Return ——
Sector
Company (Price; Ticker)
Avg.
Above
80
Below
20
YTD
(%)
12
Mos.
(%)

Exp.
Ratio
(%)

Health Care
First Trust Health Care
AlphaDEX ($14; FXH)
76
39
0
1.4
(19.9)
0.7
iShares Dow Jones US
Healthcare ($49; IYH)
74
32
1
(7.6)
(21.0)
0.5
Rydex S&P Equal Weight
Health Care ($41; RYH)
73
39
2
(1.2)
(20.9)
0.5
Health Care Select Sector
SPDR ($24; XLV)
75
31
0
(8.3)
(21.2)
0.2
Vanguard Health Care
($42; VHT)
74
31
2
(7.4)
(20.7)
0.2
Technology
iShares S&P North Amer.
Technology ($38; IGM)
75
59
4
12.1
(25.7)
0.5
iShares Dow Jones US
Technology ($40; IYW)
75
62
4
12.0
(24.5)
0.5
Technology Select Sector
SPDR ($17; XLK)
74
53
3
7.9
(25.2)
0.2
SPDR Morgan Stanley
Technology ($39; MTK)
57
33
14
16.1
(25.5)
0.5
Vanguard Information
Technology ($38; VGT)
74
61
5
10.5
(25.5)
0.2
* Quadrix scores are percentile ranks, with 100 the best.

We examined more than a dozen diversified U.S. health-care and tech ETFs using our Quadrix® stock-rating system, screening for funds with strong capitalization-weighted Overall scores. We looked for funds with at least 30% of assets in stocks that score above 80, and we excluded those that had more than 10% of their assets in stocks with Overall scores below 20. Finally, we limited our search to funds that have solid relative 12-month performance. The table above lists 10 attractive sector ETFs. For most investors, sector funds should represent only a small portion of a diversified portfolio.

FORECASTS FUND RECOMMENDATIONS
Through April 14, our recommended Growth Portfolio declined 3.1% this year, versus a loss of 6.0% for its benchmark portfolio and a loss of 6.0% for the S&P 500 Index. The conservative Portfolio fell 2.0%, versus a loss of 4.5% for its benchmark.
— Year-to-Date —
—— % of Portfolio ——
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Baron Asset ($34; BARAX)
(4.1)
E
6
7
Dreyfus Small Cap Stock Index
($12; DISSX)
(10.0)
E
6
8
Fidelity Export & Multinational
($14; FEXPX)
0.1
C
6
8
Fidelity Leveraged Co. Stock
($15; FLVCX)
0.4
B
0
0
Heartland Select Value
($18; HRSVX)
(3.1)
B
5
9
Heartland Value Plus
($18; HRVIX)
(4.8)
A
7
8
Northern Small Cap Value
($9; NOSGX)
(12.8)
E
0
0
T. Rowe Price Int’l Discovery
($24; PRIDX)
0.2
A
5
7
T. Rowe Price New Horizons
($18; PRNHX)
1.1
A
0
0
Vanguard 500 Index
($78; VFINX)
(6.1)
D
7
7
Vanguard Dividend Growth
($10; VDIGX)
(5.5)
C
8
10
Vanguard Emerging Mkts. Stock
Indx. ($17; VEIEX)
12.5
A
0
5
Vanguard GNMA ($11; VFIIX)
2.5
B
6
0
Vanguard Inter.-Term Tax Exempt
($13; VWITX)
3.8
C
0
0
Vanguard International Value
($22; VTRIX)
(6.7)
B
8
9
Vanguard Short-Term Invest.-Grade
($10; VFSTX)
3.0
A
0
0
Vanguard Total Bond Mkt. Index
($10; VBMFX)
0.8
D
20
0
Vanguard Wellesley Income
($17; VWINX)
(4.7)
E
0
7
Vanguard Wellington ($23; VWELX)
(4.0)
E
9
10
Wells Fargo Advantage
High Income ($6; STHYX)
8.4
C
7
5
* Rankings through Mar. 10 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. c Closed to new investors.

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