S&P 500 ETFs Vs Ex-Sector ETFs

The replication of the broader U.S. market – the S&P 500 index (SPY) – may be surging lately on Fed-induced optimism, but on the year-to-date frame it is still a laggard (as of October 15, 2015), having slid about 1.6%.  Relentless global growth worries, be it over China, Europe, Japan or the emerging market block and occasional issues in some specific corners of the domestic market hit the index hard this year.

Even if the market rebounds in the final quarter of the year on hopes of persistent inflows of cheap dollar from the Fed, cheaper valuation and the seasonal tailwind of the all-important holiday season, the odds are not out of the way. After all, the S&P 500 index is made up of large-cap stocks which are largely tied to the global perspective.

This is where the idea of the Ex-Industry S&P 500 ETFs launched by ProShares comes from. As of now, ProShares has four ETFs, namely S&P 500 Ex-Financial ETF (SPXN - ETF report), S&P 500 Ex-Health Care (SPXV - ETF report), S&P 500 Ex-Technology (SPXT - ETF report) and S&P 500 Ex-Energy (SPXE - ETF report). 

As the names suggest, all these ETFs provide exposure to the companies of the S&P 500 with the exception of those companies included in the financial, health care, technology and energy sector, respectively.

How Do These Fit in a Portfolio?

Notably, Financials, Medical, Technology and Energy account for about 20.7%, 13.7%, 20.6% and 4.1% of the S&P 500 index, respectively. So, if a particular sector is underperforming at a given period of time, investors can easily chuck that out from the broader S&P 500 index by investing in that ex-sector ETF (read: 3 Sector ETFs Hit Hard by the Market Sell-off).

What could be a better example than the energy sector, which has been a pain for the last one and a half year in the marketplace and is still not showing any definite sign of a recovery anytime soon? In such a situation, an ex-energy S&P 500 ETF – or SPXE – could an intriguing pick.

The technique is equally gainful even at the time of short-selling. If a sector is outperforming the broader market, investors can easily short sell that particular ex-industry ETF and earn smart gains. The aforementioned sectors outperformed/underperformed the broader market index this year and in previous years as well by a wide margin. The chart below can be used to understand the trend (read: 4 Sector ETFs for Q4):

 
Moreover, the issuer noted that investors might have enough sector exposure from the other holdings and so could be intrigued by an ex-sector ETF. 

Below we highlight the concerned ETFs in detail so that investors can get a fair idea of which ex-sector ETF can emerge as a game changer and when. As far as competition goes, the newly launched funds should receive their share of success ahead given that their underlying idea is novel.

SPY in Focus 

This most popular ETF with $131 billion of assets charges 9 bps in fees. IT (20.6%), Financials (16.1%), Health Care (14.4%), Consumer Discretionary (13%) and Industrials (10.2%) get doubt-digit exposure in it. Energy has a relatively low exposure of 7.4% in the fund.

SPXN in Focus

This new 441-stock fund charges 27 bps in fees and has amassed about $4.1 million of assets having debuted in late September. IT (24%), Health Care (18.3%), Consumer Discretionary (15.5%), Industrials (11.9%) and Consumer Staples (11.6%) are the top sectors with double-digit weight. The product has P/E ratio of 23.59 times.

Given the low interest rate environment and the potential pressure on the financial companies’ net interest margin, some investors might choose to pick this fund at the current level.

SPXV in Focus

This 446-stock fund also has $4 million in assets. Here, IT (23.6%), Financials (19.6%), Consumer Discretionary (15.2%), Industrials (11.7%) and Consumer Staples (11.4%) get doubt-digit exposure. The product has P/E ratio of 20.50 times. Occasional sell-off in health care stocks on overvaluation and pricing issues can be opportune times for this fund.

SPXT in Focus

This 428-stock fund has a P/E of 22.10 times. Financials (21.5%), Health Care (19.7%), Consumer Discretionary (16.6%), Industrials (12.8%) and Consumer Staples (12.5%) get doubt-digit exposure. While the technology sector saw great momentum lately, this high-growth sector normally succumb to a slowdown if global growth concerns flare up or a flight-to-safety trend sets up. SPXT can be an answer to these sector-specific tough times.

SPXE in Focus

This 462-stock ETF has a P/E of 22.01 times. IT (21.6%), Financials (18%), Health Care (16.4%), Consumer Discretionary (13.9%) and Industrials (10.7%) get doubt-digit exposure in it. Now this should be the most-eyed fund given the relentless energy price slump (read: Oil Tumbles to Six-Year Low: ETF Tale of Two Sides).