How to Sidestep the S&P 500's Weak Spots
It is not just enough to be invested in the markets to grow an investor's portfolio. It is also important to reduce exposure to certain areas in a changing market environment.
Investors may consider an ex-sector stock exchange traded fund strategy in the current environment to exclude exposure to underperforming areas and participate in broad market growth.
Most investors turn to beta index-based ETFs, like the SPDR S&P 500 ETF (NYSEArca: SPY), to fill out their core stock portfolio position. However, the broad approach may expose investors to underperforming segments of the market. For instance, among its top sector allocations, the S&P 500 Index includes a hefty 20.4% position in information technology and 13.7% in health care, two segments that have been relatively flat over the past month as other sectors rallied on the Donald Trump victory.
Alternatively, investors can remove these weak areas and still participate in the S&P 500 through ex-sector ETFs like the S&P 500 Ex-Health Care ETF (NYSEArca: SPXV) and the S&P 500 Ex-Technology ETF (NYSEArca: SPXT).
"An investment in the S&P 500 that excludes a particular sector gives you the flexibility to tailor your core U.S. equity exposure," according to ProShares. "It can replace a traditional S&P 500 fund, allowing you to underweight or even eliminate a sector in your portfolio."
Like their names imply, SPXV excludes health care exposure and SPXT excludes tech companies. Potential investors, though, should be aware that since the funds purposely exclude exposure to some of the largest S&P 500 market sectors, the ETFs portfolios allocations will overweight other large market segments in their place.
SPXV includes a larger 24.9% tilt toward tech, 15.0% financials, 14.7% consumer discretionary, 11.6% consumer staples and 11.4% industrials. SPXT tracks 19.3% health care, 16.8% financials, 16.5% consumer discretionary and 13.0% consumer staples.
Something like SPXT may be a way for investors to still maintain broad market exposure but reduce exposure to a weakening outlook in the tech segment as investors rotate out of the growth style and a stronger U.S. dollar weighs on multi-national company's overseas revenue streams.
The ex-sector ETFs may also act as a type of sector rotation strategy as health care and technology stocks were previously outperforming areas of the market and have now been replaced by the currently outperforming financials and energy segments.
In previous periods, investors would have turned to the S&P 500 Ex-Energy ETF (NYSEArca: SPXE), which provides exposure to S&P 500 companies with the exception of those included in the Energy Sector, and the S&P 500 Ex-Financial ETF (NYSEArca: SPXN), which tracks the same S&P 500 group sans financial stocks.
Potential investors, though, should be aware that these ETFs are still rather small, so utilize limit orders to take better control over trades.
This article was provided by our partners at etftrends.com.