ETFs Have Appeal For Sector Investors
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.
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.