ETFs offer diversity options
By Meg Richards
NEW YORK Equity index funds are usually associated with the most passive form of investing: Buy one and you get quick, easy exposure to a broad swath of the market. But with the rise of specialized exchange traded funds, indexes are being used more often by active investors in complicated strategies.
With ETFs, which track indexes and are traded like stocks, investors can get inexpensive, tax efficient sector exposure while tilting their portfolio wherever it suits them. You could build your own version of the Standard & Poor's 500 with Sector SPDRs which divide the index's nine sectors into ETFs buying as much or as little of each sector as you like.
"This combines the benefits of index investing with a truly customizable approach to investing your money," said Dan Dolan, director of wealth management strategies for Sector SPDRs. "You know exactly what you own, with a low cost, and you can do it with your own objective in mind."
There are more than 100 ETFs around, and professional investors are finding new and novel uses for them all the time. ETF asset levels reflect their rising popularity: The Sector SPDRs held only $400 million when they were created in 1998; their assets grew to $4.5 billion by last June, and now stand at $7.1 billion.
The caveat with ETFs is that they're expensive for people who regularly add to their investment portfolio, because trading costs are incurred each time new shares are purchased not the case with most mutual funds. But for people considering allocation strategies for a larger nest egg, perhaps $100,000 or more, sector ETFs can offer simple solutions.
Sector ETFs can be a tool for gaining greater diversity. Suppose you work for a bank, and your spouse works for a software concern, and you both have stock options. Rather than owning a broad S&P index, in which tech and financial stocks account for 42 percent, your financial adviser might suggest you get targeted exposure to other sectors of the market through ETFs.
ETFs may also hold appeal for smaller investors who prefer to buy individual stocks. For example, if you think energy prices will stay high, you could gain additional exposure through sector ETFs.
The difference is, unlike stocks, ETFs charge expenses, albeit low ones. The energy SPDR, for instance, has a 0.28 percent expense ratio, meaning if you invest $10,000, you'll be charged $28 a year to own it.
"For that $28 a year, you have the peace of mind of owning 27 companies," Dolan said. "You own a diversified portfolio of energy stocks instead of one stock. Now is that worth it? I would make the case that it probably is."