FULL DISCLOSURE:
I am not a financial advisor. This post is to provide information and not provide financial product advice. I discuss why I personally chose to invest in a stock, ETF, REIT, investment fund or cryptocurrency (which I have held for over a week) and also share information that is public about the following stock, ETF, REIT, investment fund or cryptocurrency and they are based on my own personal opinion.
I will not blog about any positions of stocks, ETFs or REITS and cryptocurrency which were initiated just within the last 72 hours of posting this blog article.
It is recommended that you should always consider visiting a financial advisor for independent financial advice before making investment decisions.
I do not work in the financial industry, so just because I write about it, doesn’t mean you should own it. So, consult with a financial advisor and do your due diligence, RESEARCH!
I am not receiving compensation by the company for this blog post.
I have no working relationship with any company whose stock, ETF, REIT or cryptocurrency mentioned in this blog post. Nor do I have a family member or friend who works with the company.
I have written about the positives of diversification and why I practice diversification of my stock investments in the 11 GICS (Global Industry Classification Standard) sectors for my investment portfolio.
But one of my first investments which took me to the path of diversification was to invest in the Select Sector SPDRs.
According to the company:
An Equal Sector Strategy is a strategy that delivers exposure to the US Large Cap Equity market by investing equal proportions in each of the 11 Select Sector SPDRs
This strategy delivers moderate, yet meaningful exposure to every sector of the market. As a result, investors have the opportunity not only to participate in a sector rally wherever it may occur, but also to minimize the negative impact of a crash in any individual sector by rebalancing back to equal weight (9.09% in each sector) quarterly. In addition, the Equal Sector Strategy has the following benefits:
- Diversification
- Transparency and control over sector allocations
- Consistent performance
- Lower volatility than the S&P 500
These are unique ETFs (Exchange Traded Funds) that divide the S&P into eleven funds traded throughout the day on NYSE Arca.
| XLB | Materials Select Sector SPDR Fund – This Index is primarily composed of companies involved in such industries as chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products. Among its largest components are DowDuPont, Monsanto, Praxair and Ecolab. |
| XLC | Communication Services Select Sector SPDR Fund – This sector is designed to reflect modern communication activities and information delivery mechanisms. Industries include Telecommunications, Media, Wireless, Entertainment and Internet Media. Components include Alphabet, Facebook, Disney, AT&T, Verizon, Comcast and Netflix. |
| XLE | Energy Select Sector SPDR Fund – Energy companies in this Index primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, Schlumberger and ConocoPhillips. |
| XLF | Financial Select Sector SPDR Fund – A wide array of diversified financial service firms, insurance, banks, capital markets, consumer finance and thrift companies are featured in this index. Among the stocks included in the Index are Berkshire Hathaway, JPMorgan Chase, Wells Fargo, BankAmerica Corp and Citigroup. |
| XLI | Industrial Select Sector SPDR Fund – Boeing, GE, 3M, and Honeywell are among the largest components by market capitalization in this sector. Industries in the Index include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, machinery, commercial services and supplies, air freight and logistics, airlines, marine, road and rail, etc. |
| XLK | Technology Select Sector SPDR Fund – Stocks primarily covering products developed by internet software and service companies, IT consulting services, semiconductor equipment, computers and peripherals are included in this Index. Components include Apple, Microsoft, Visa, Intel and Cisco. |
| XLP | Consumer Staples Select Sector SPDR Fund – The companies in this sector are primarily involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Proctor & Gamble, Philip Morris International, Coca-Cola and Pepsi |
| XLRE | Real Estate Select Sector SPDR Fund – The Real Estate Index includes companies from the following industries: Real Estate Management & Development and REITs, excluding Mortgage REITs. Components include Simon Property, American Tower, Crown Castle and Equinix. |
| XLU | Utilities Select Sector SPDR Fund – The Utilities Index primarily provides companies that produce, generate, transmit or distribute electricity or natural gas. The component companies include NextEra Energy, Duke, Southern, and Dominion. |
| XLV | Health Care Select Sector SPDR – Companies in this sector primarily include health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Johnson & Johnson, Pfizer, UnitedHealth and Abbott Labs are included in this sector’s mix. |
| XLY | Consumer Discretionary Select Sector SPDR – Industries such as retail, automobiles and components, consumer durables, apparel, hotels, and restaurants are primarily represented in this sector. The Index includes Amazon, Tesla, Home Depot, McDonald’s, and Nike. |
When I first started, I went with SPDR’s first tax strategy:
Select Sector SPDRs can help investors manage more tax-efficient investment portfolios. Before entering into any tax-related strategies, consult your tax advisor.
STRATEGY 1: TAKE INDIVIDUAL STOCK LOSSES WHILE MAINTAINING EXPOSURE TO THE SECTOR
Sell individual stock positions currently trading below purchase price, realize the loss and maintain similar sector exposure by purchasing the appropriate Select Sector SPDR.
Today, I use their asset allocation strategy:
STRATEGY 1: DIVERSIFY AN EXISTING PORTFOLIO WITH SELECT SECTOR SPDRS
When reviewing your portfolio, you realize that you are overexposed to certain sectors and underexposed to others. Use Select Sector SPDRs to over-weight underrepresented sectors and reduce exposure to sectors that overlap.
Example: Although you have investments in individual stocks, index funds and actively managed mutual fund, many individual stocks are also owned in large percentages by both the index funds and active mutual funds. As a result, this particular stock portfolio is heavily weighted with large cap names in the financial, technology, and health care sectors. However, as of the end of 2012, these three sectors also comprised 49% of the S&P 500 Index.
To correct the imbalance in the portfolio, you replace a portion of the technology, health care and financial stocks with investments in the Materials (XLB), Industrial (XLI) and Consumer Discretionary (XLY) Select Sector SPDRs. These sectors are under-weighted in both the mutual fund and index portfolios, and will help offset the technology, health care and financial sectors, which are still well represented in your other investments.
And their other asset allocation strategy:
STRATEGY 2: DON’T PUT ALL OF YOUR EGGS IN ONE BASKET: USE SELECT SECTOR SPDRS TO REBALANCE
As a prudent investor, you must make periodic appraisals of your portfolio. As market conditions change, investment positions may need to be adjusted in order for you to remain consistent with the investment objectives.
Example: A market rally in one sector can leave you exposed to a crash in the next business cycle. We all remember the tech bubble that burst in 2000. The following table shows the percentage of the S&P 500 in the technology sector at various stages.
| Sector | Date | Percentage of S&P 500 (by market cap) |
|---|---|---|
| Technology | 08/14/1998 | 11% |
| Technology | 03/31/2000 | 39% |
| Technology | 12/31/2002 | 18% |
Investors who bought the S&P 500 Index in 1998 were only counting on roughly a 11% exposure to technology. However, by March of 2000 technology stocks accounted for almost 40% of the market capitalization of the Index. By the end of 2002, the technology portion of the S&P 500 had lost more than half of its value from a high in March 2000. Select Sector SPDRs can be used as a rebalancing tool to ensure that you’re not overly exposed to any individual sector.
I have to admit that before doing this, I was hesitant and didn’t know where to start back then. While I did my research, there are so many opinions on the Internet and with a lot of opinions, you have to do your due diligence and also take a look at your financial situation.
You ask people on social media groups, they will tell you what they do but there was no way I could afford to invest in 100-1,000 shares of stock towards a position. I did not have $50,000 or $100,000. Heck, I did not have $10,000 to immediately invest with.
But I wanted to start with a clean slate in my portfolio, to not invest on what everyone was jumping on because it was on social media, who want to pump and sell.
So, before I started investing, I knew that ETF’s were safer than stock and also with ETF’s, they hold positions in companies pertaining to that ETF area or sector.
I also knew going in that owning a stock and owning an ETF had their own positives and negatives. With owning of a stock, the return of a company’s stock can come in dividends or growth, while an ETF is concentrated on many companies and not just one, there is lesser of a risk but you may not get the bigger dividends and an annual fee will be deducted, so you want an ETF with a low gross expense ratio.
Where I was at the time, I wanted less risk, I wanted to learn about sector-based investing and with an ETF, this was the best way to go at the time and it was affordable.
I looked at Vanguard which had sector-based ETF’s, it had a low gross expense ratio but they were out of my price range for various sectors.
Fidelity had sector-based ETFs which were affordable and had a low gross expense ratio but I wanted a company that represented all eleven which was affordable, had a low gross expense ratio but also paid better dividends. So, I decided to settle on Select Sector SPDR’s.
The company has its own mobile app for the Android or iOS and you can track these select sector ETFs and get a good idea of how the market is doing.
I like looking at this to let me know which market to invest and where I can look for the dip. As you can see, on this day, Health Care was down, but for me I look at that as a buying opportunity to purchase additional shares of a stock which I have in my portfolio.
Granted, you could get the app or go on the website to track a sector without investing in Select Sector SPDR ETFs.
As mentioned, earlier when I started investing, I started with Select Sector SPDR ETFs and I’m not going to get into every Select Sector SPDR ETF but let’s take a look at XLU as an example, which is the Utilities Select Sector SPDR Fund.
The Utilities Index primarily provides companies that produce, generate, transmit or distribute electricity or natural gas. The component companies include NextEra Energy, Duke, Southern, and Dominion.
Despite the market crash of 2003 and 2008 and the Pandemic of 2020, the growth of XLU has been steadily increasing. I liked that, so I invested in it.
The company pays a .49 dividends each quarter which is a plus. The gross expense ratio is only 0.12% a year and the ETF has 30 holdings in companies such as NextEra Energy Inc., Duke Energy Corp., Southern Co., Dominion Energy Inc., Exelon Corp., American Electric Power Co., Inc., Sempra Energy, Xcel Energy to name a few.
The ETF has a Morningstar Rating of 4 and the historic return is above average and the historic risk is Above Average. Market Edge Ratings (Market Edge Second Opinion Weekly) is set at long and the power ranking is 40.
This is an ETF to hold for long term and I look to compound for the dividend.
Now, a few things have changed since I started diversifying. For beginners looking to invest in sector-based ETFs, one advantage of using a brokerage like Schwab is that you can see “Similiar ETFs”. While I like Select Sector SPDRs, there is competition that offer similar holdings, offer dividends and are much cheaper. May it be Fidelity, First Trust, iShares, Invesco.
source: schwab.com
I look at the growth to the ETF, its gross expense ratio, its portfolio turnover, its total assets and of course, its dividends. By having a professional brokerage account, you can compare data, charts and much more for your research. This is very important and I can tell you that I have various brokerages, but my favorite is through Charles Schwab.
As you can see from the above comparison through Schwab, not all Utilities ETFs are equal. You can see the difference is gross expense ratio, total assets, price point and you can also look into their dividend payments but also their total holdings and what companies they primarily invest in.
But for me, it was a way to get my foot in the door of investing in the various sectors and I’m glad I did. But along with these ETF’s, I have identified a few high dividend stocks within that sector that I invest in that along with the sector-based ETFs, but as I continue to invest, I do know that I have in certain areas more than a few others. By owning a sector based ETF, I can use it as a rebalancing tool.
Depending on my periodic appraisals of my portfolio and knowing the market can change. I do want to be prepared and for me, investing in sector-based ETFs are the way to go. But I do know, my personal strategy is that I am planning to hold these long term, so I have an investments in sector-based ETFs in the eleven sectors.
As always, perform due diligence and do a lot of research before investing. Talk to a financial advisor and find out if investing in sector-based ETFs are a perfect investment for you.
