Use these ETFs to perfectly diversify your portfolio
Diversification between sectors is important. As a rule, it is addressed by investors who choose individual stocks. But it should also be a focus for passive investors who maintain a portfolio of ETFs only.
The ETF itself is usually very popular precisely because it provides diversification directly within a given sector, trend or geographic area. But what if you want to diversify across sectors as well? Then check out this introduction to interesting ETFs from each sector.
Financial Sector - $IVOL+1.1% - Quadratic Interest Rate Volatility and Inflation Hedge ETF.
IVOL - Quadratic Interest Rate Volatility and Inflation Hedge ETF is an inverse ETF that seeks to provide exposure from yield curve volatility while protecting against inflation. It tracks the QVOL Strategic Interest Rate Volatility and Inflation Hedge Index.
It is structured as an inverse ETF, meaning it should rise when bond market volatility rises. It uses derivatives including option strategies and swaps to achieve its objective. It seeks to provide positive exposure to movements in interest rate volatility. If interest rates are very volatile and changing, this should be a positive for this ETF.
It also includes strategies designed to protect against inflation. The goal is to maintain a positive real return even in a high inflation environment. Rather uncharacteristically for an ETF, it has high management costs because it uses derivatives. Currently, the management fee is 0.95% and turnover is about 6%.
Health Care - $XLV+0.4% - Health Care Select Sector SPDR.
XLV - Health Care Select Sector SPDR is an ETF that tracks the health care sector according to the S&P 500 Health Care Index. It includes companies involved in pharmaceutical manufacturing, biotechnology, medical technology, medical supplies distribution and healthcare services.
It is compiled by the S&P 500 Health Care Index, which includes companies whose revenues are primarily derived from the healthcare sector. It consists of leading pharmaceutical, biotechnology and healthcare companies.
Some of the largest holdings in this ETF include companies like Johnson & Johnson, UnitedHealth, Pfizer, Merck & Co. and Abbot Laboratories. Together, they make up about 60% of the entire portfolio.
Its total assets are over $26 billion, making it one of the larger ETFs in the market. It trades on the New York SPDR exchange. It offers exposure to the health care sector, which has decent long-term growth prospects due to an aging population and the development of new drugs and technologies. It has a well-diversified portfolio with over 70 holdings, so it reduces individual company risk. On the other hand, it is highly concentrated in the US.
Consumer Staples - $VCR+0.4% - Vanguard Consumer Discretionary ETF
The VCR - Vanguard Consumer Discretionary ETF is an ETF that tracks companies focused on selling consumer goods, such as automobiles, consumer discretionary, recreation, apparel and retail. Thus, it is an exposure to consumer stocks with a focus on discretionary spending (spending that is not directly dependent on standard of living).
VCR's portfolio includes over 300 consumer goods companies from around the world, including big names like Amazon, Home Depot, McDonald's, Nike and Starbucks. With broad diversification across various consumer goods subsectors, it reduces individual company risk.
It is a relatively small ETF with around $5 billion in assets. It tracks the MSCI US Investable Market Consumer Discretionary 25/50 Index , which includes large, mid and small companies active in the consumer discretionary sector.
The main advantage of this ETF lies in its broad exposure to consumer-related companies, which has decent growth prospects over the long term due to rising living standards in developed economies. However, the sector inherently has a higher degree of cyclicality as it is sensitive to economic developments and the vagaries of fashion. In times of recession, consumer stocks tend to weaken more than the market.
Technology - $QTEC+0.0% - First Trust Nasdaq-100 Technology Sector Index Fund.
The First Trust Nasdaq-100 Technology Sector Index Fund is managed by First Trust Advisors. This ETF focuses on investing in stocks of companies in the technology sector and tracks the performance of the Nasdaq-100 Technology Sector Index.
The Nasdaq-100 Technology Sector Index includes 33 of the largest technology companies traded on the Nasdaq Stock Market. These companies include Apple, Microsoft, Amazon, Alphabet (Google's parent company), Facebook and Intel.
The ETF allows investors to gain diversified exposure to the technology sector and invest in it with less risk than buying individual company stocks directly because it diversifies risk across many companies. Investors who believe in the growth of the technology sector may find this ETF an attractive way to participate in that growth.
Communications - $FCOM+0.0% - Communication Services Select Sector SPDR Fund
The FCOM - Communication Services Select Sector SPDR Fund is one of the ETFs that tracks the newly created communications sector as tracked by the S&P 500 Index. This sector was created in 2018 by the merger of the telecom and media industries.
The FCOM portfolio includes leading companies in these sectors. Typically, Verizon, AT&T, T-Mobile. Media and entertainment are Netflix, Comcast, Alphabet, Walt Disney, ViacomCBS, Facebook and others. Internet services are represented by eBay, TripAdvisor, Twitter...
Fidelity MSCI…
FCOMFCOM seeks to provide exposure to the earnings and stock price of companies in the communications sector generally. With a diversified portfolio of over 60 titles, it reduces individual company risk. On the other hand, it is highly concentrated in the US.
Returns from this sector are tied to the economic cycle and the growth rate of the global economy, which stimulates demand for their services. On the other hand, firms in the sector have decent growth opportunities due to the development of new technologies and the growth of the internet economy.
Underlying Materials - $XME+0.8% - SPDR S&P Metals & Mining ETF
XME is an exchange traded fund (ETF) that tracks the performance of stocks of companies involved in the metals and minerals mining and processing industry. The fund invests in stocks of companies involved in the mining and processing of ferrous and non-ferrous metals, such as copper, aluminum, zinc, nickel, lead, silver and gold. The main areas include mining and processing of these metals, steel and alloy production.
XME holds shares of leading companies in the industry such asFreeport-McMoRan, Nucor, US Steel, Alcoa, Teck Resources. These companies benefit from the growing demand for raw materials and metals around the world. With the development of emerging markets, the demand for steel, copper and other metals is increasing. This supports the growth in revenue and profitability of the companies in XME's portfolio.
XME is suitable for investors looking to diversify their portfolio and gain exposure to the mining and materials sector. However, apart from shares of companies in the metals and minerals sector, XME offers no other diversification. The value of the Fund may fluctuate significantly depending on the performance of stocks in the mining and metals sector, which are sensitive to the economic cycle.
Energy - $VDE+1.3% - Vanguard Energy ETF
VDE is a Vanguard exchange traded fund focused on stocks of companies in the energy sector. The fund invests in stocks of leading global companies involved in oil, natural gas and coal production, electricity generation and distribution, and energy services. Core areas include oil, gas, coal, nuclear power and renewable energy.
VDE holds a diversified portfolio of shares in companies such as ExxonMobil, Chevron, BP, Royal Dutch Shell, ConocoPhilips, as well as smaller companies in the solar and wind energy sectors. These companies benefit from the growing demand for energy around the world. With the development of emerging markets, the consumption of oil, gas and electricity is increasing, which supports the growth of revenues and profitability of the companies in the VDE portfolio.
The entire sector and therefore VDEs are extremely volatile and cyclical. This must be taken into account.
Utilities - $VPU-0.1% - Vanguard Utilities ETF
The VPU - Vanguard Utilities ETF provides exposure to companies operating in the utilities sector. It focuses primarily on the following areas:
- Electricity and Gas: VPU owns shares of companies that produce, distribute and sell electricity and gas.
- Water and Waste: Includes companies providing drinking water supply systems and waste disposal solutions.
- Telecommunication services: Companies providing telephone, internet and other communication services.
The largest items in VPU's portfolio are companies such as NextEra Energy, Duke Energy, Dominion Energy and Southern Company - all in the power generation and distribution business.
VPU tracks the MSCI US Investable Market Utilities 25/50 Index, which includes leading utility companies, including small and mid-sized companies.
It holds approximately 100 electric, gas, water and communications companies in its portfolio, which , in addition to the relatively stable nature of the sector, helps reduce the risk of asset price volatility. Utilities is a low-growth, dividend-focused sector as regulation limits corporate profits. However, stocks in this sector are considered relatively defensive.
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.
For me, diversification in today's globally interconnected world is a terribly complex topic and I believe it doesn't work very well. Diversification in the sense of commodities/shares/crypto (partially) and then maybe real estate makes sense to me... but diversifying in just stocks for example (somehow long term) is almost impossible for a mere mortal in my opinion... except for trading but I'm not into that :)
I don't see that as such a problem. Estimating which sectors will do better, for example at high rates, is not such a problem
Yeah, sure, but I guess it's how each of us approaches diversification... I think of it in terms of a portfolio that I'm building for maybe 20-25 years :)
If someone is looking for diversification, funds are a great opportunity to do so. There is no need to look for complicated formulas in the market and to find complicated companies to diversify, while the company itself must be good and preferably profitable in the future. This is a great way to diversify.
Portfolio diversification is important, so these funds can be useful. But it depends on the investment horizon and risk profile of the investor. For long-term investors, they might be suitable.