Keep it simple with Sectors and ETFs
Breaking the market into sectors allows you to visualize the market in pieces versus a whole. The benefit of that is the ability to ignore all the comments made relative to the market. Too often the media is guilty of generalizing investing into the market. When they define the market they are generally talking about all the investment which make up the market, but then quote the S&P 500 index, the Dow Jones Industrial or the NASDAQ. However, those are only the U.S. equity indexes and they are not the market as a whole. I am not trying to nitpick the process of the media, but to neutralize the psychological impact on how we view our money. Investing is as much a psychological game as it is a logical one.
Sectors break the market down and allow the specific issues to be addressed. For example if we discuss the healthcare sector we know exactly what the topic is being discussed and we can look at the sector in reference to the broad index. In addition, if we need to, we can break the sector down further to determine the subsectors that are impacting the sector. In the case of healthcare we could look at the HMO’s, healthcare providers, pharmaceuticals, biotech or medical devices. This allows for even further examination of what is moving this sector of the market.
In the past we had to buy the leading stocks in the sector in order to benefit from the growth of the sector or subsector, however the introduction of exchange traded funds (ETFs) has changed how we invest. We can still invest in the stocks of the sector or we can use an ETF which captures all the stocks within that particular sector or subsector. This allows for more diversification in the investment process. This could dampen returns as a result, but it also reduces the amount of time necessary to analyze a sector. Time management, simplicity and focused investing are all benefits of keeping it simple with sectors and the matching ETFs.
Today there are more than 860 ETFs and counting. However, we can narrow that list down to around 140-150 that will capture almost every sector you would want to invest your money. It also includes the inverse funds which allow you to take advantage of downtrends in specific sectors. This introduces a completely different strategy you can implement for managing your money. Sectors and ETFs have created a simple way for investors to develop and implement disciplined trading strategies which didn’t exist prior. Take the time to study the benefits of exchange trade funds as well as the different strategies you can implement.
Keeping it simple with Sectors and ETFs has open a whole new world for investors.
