Published On: Wed, Feb 20th, 2013

Sector ETF

A Sector ETF is a security that is structured like a mutual fund but is traded intraday like equity.

A Sector ETF is comprised of multiple shares of stock from the same sector.  In this way a Sector ETF offers the diversification properties of a mutual fund, as the ETF holds a “basket” of shares inside the ETF’s balance sheet.  The value of the ETF is then calculated moment by moment during the trading day by the weighted average of the equities that are included in its balance sheet.  Like a mutual fund, the theory is that while the trader runs the risk that one or a few stocks will lose value, the ETF enjoys the benefit of many separate holdings to diversify the risk of a concentrated equities position.

Like all ETFs a Sector ETF is diversified, but limits the equities on its balance sheet to those in only one sector.  An example would be financial services Sector ETF that invests in only bank and brokerage stocks.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.