Asset managers such as Vanguard, State Street and BlackRock have made it easy to own individual sectors of the stock market through low-cost mutual and exchange-traded funds. But are they good investments? The funds offer a simple way to diversify. For example, if your stock portfolio is heavy on shares of individual technology and energy companies, balancing those holdings with ETFs in sectors such as real estate and healthcare can provide a smoother ride.
And a sector fund could make sense if you have a strong conviction that a particular area of the economy, such as finance, is underappreciated and will accelerate as investors recognize its true value. I have been analyzing long-term data on Select Sector SPDR ETFs, which are managed by State Street and based on indexes that are subsets of the S&P 500 index, the large-company benchmark. Some of the results are striking.
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As you can probably guess, one sector has been a standout performer: technology. For the past 10 years, the average annual returns of seven out of the nine sector funds I studied fell into a narrow range, from 8.2% to 12.
3%, but the Technology Select Sector SPDR Fund ( XL.
