Investors that believe in passive investment strategies by replicating the broader US market – the S&P 500 index – may not be very happy about the market’s performance year-to-date. Relentless worries over global growth, be it China, Japan, Europe or the emerging markets, the index got hammered several times this year.
Empirical data show severe downturn even in one sector is good enough to bring the markets down to their knees; for example at the turn of the century it was the tech/dot-com bubble, and more recently in 2008 the sub-prime crisis in the financial services sector triggering a full-blown global recession.
Needless to say, amidst such historical evidence, debates are raging if the plunging oil prices and accompanying defaults by energy companies could spark another financial crisis. Hence excluding certain sectors that are likely to underperform could be one obvious investment call.
ProShares, the largest US issuer of inverse, leveraged and alternative exchange-traded funds, recently launched four funds that give investors exposure to the broad world of equities, but underweights specific sectors for tactical (short-term) reasons. Each ProShares S&P 500 Ex-Sector ETF blanks out exposure to a certain sector: namely energy, financials, technology and healthcare.
The ETFs are:
- S&P 500 Ex-Energy ETF (SPXE)
- S&P 500 Ex-Financial ETF (SPXN)
- S&P 500 Ex-Healthcare ETF (SPXV)
- S&P 500 Ex-Technology ETF (SPXT)
It’s difficult to argue against the efficacy of such an investment strategy if investors consider the new products in the backdrop of say, the energy sector, which lost a third of its value in the past 12 months.
With high valuations and dismal earnings expectations, energy stocks looked unattractive even at the beginning of the year. However, such sharp discrepancy in attractiveness does not happen very often, which could limit their attractiveness to institutional investors.
While there’s no question sector-investing has been hugely popular – as evidenced by the SPDR suite of S&P 500 sector ETFs that commands more than $85 billion in combined assets – the new funds may appeal to investors who already have sizable exposure in a particular sector and are looking for a way to invest in most of the market to increase diversification.
Omitting a beaten-down sector gives the opportunity to add a few extra percentage points without really betting the farm. After all, the risk of making a really bad call is not as large as taking a narrow position in a particular sector and nothing else.
All the Ex-Sector ETFs have an annual expense ratio of 0.27 percent.
Disclosure: No holdings