Investing in exchange traded sector funds
People - Investing
Thursday, 25 November 2010 20:37

Think twice before you invest in exchange traded sector funds.

Three reasons why they might perform worse than the market:

  • Many sector ETF's have a market cap weighted allocation of assets. That means they invest relatively more in overvalued assets.
  • Many sector funds invest in so called "hot" industries. For example 100 years ago it was not too difficult to invest in Russian rail companies. And 10 years ago there were more funds investing in internet companies than now. Today a new hype could be investing in commodities such as gold. Such hot industries have less attractive valuations because people think such industries will grow faster than the market as a whole. That is, some or most of this expected growth is already priced into these assets.
  • Sector ETF's usually have higher expense ratio's than more diversified ETF's.