Blogs & Comment

Sector ETFs for small-cap growth areas

Sector exchange-traded funds (ETFs) dont get as much respect as broad-based ETFs. But Jeffery Feldman and Andrew Hyman put in a good word for them in their book, Three Paths to Profitable Investing: Using ETFs in Healthcare, Infrastructure, and the Environment to Grow Your Assets , (2010).
In some sectors of the economy, like U.S. biotechnology and green energy, there is exciting innovation going on that could lead to sustained growth over many years. The trouble is most of the firms are still small and quite risky. A few will emerge dominant and enjoy decades of growth but many others will fall by the wayside.
An ETF for the sector can spread the firm-specific risk. It allows the investor to place a bet on the innovation percolating within the sector without having to worry about picking the right company.
Investors will have a better chance of snagging some winners and the winners will drive the performance of the sector ETF. They can post 500% or more gains, which culd easily swamp the losses registered by thefirms that struggle orbecome insolvent.The sector ETF is a way, then, to throw a wide net and possibly catch the next Microsoft, Google, Apple, etc. Yet, unlike broad-based ETFs, it will not dilute the contribution of a high-flying stock as much.