A sector exchange-traded fund (ETF) is designed to track companies within a particular industry or sector of the economy. Unlike broad market ETFs, which spread investments across multiple industries, sector ETFs concentrate on a single slice of the market – whether it’s technology, healthcare, energy, or financials. This means you’re betting on the success of a specific industry or sector rather than the market as a whole.

These ETFs are typically linked to a sector-specific underlying index like the S&P 500 Technology Sector Index or the MSCI World Healthcare Index. If you believe a specific sector is on the rise, a sector ETF allows you to capture that growth more directly.

Common sectors for targeted exposure

Some of the most common sectors targeted by ETFs include:

• Technology : Includes companies involved in software, hardware, and IT services
• Healthcare : Focuses on pharmaceuticals, biotech, and medical equipment
• Financials : Comprises banks, insurance companies, and other financial services
• Energy : Tracks companies involved in oil, gas, and renewables
• Real estate : Invests in real estate investment trusts (REITs) and property development companies

Each sector comes with its own set of risks and growth opportunities. Sector ETFs give you the chance to tap into industries that align with your market view.

Popular sector ETFs on Pearler

Here are a few sector ETFs you can invest in via Pearler:

• Betashares Global Cybersecurity ETF (HACK) : Focuses on global companies involved in cybersecurity, giving investors exposure to the growing tech sector
• VanEck Vectors Australian Banks ETF (MVB) : Provides targeted exposure to the largest Australian banks, focusing on the financial sector
• Betashares Global Healthcare ETF (DRUG) : Tracks global healthcare companies, offering access to the healthcare sector, including pharmaceuticals and biotechnology
• SPDR S&P/ASX 200 Resources ETF (OZR) : Offers exposure to companies in the Australian resources sector, including mining and energy
• Vanguard Information Technology ETF (VGT) : This ETF focuses on the technology sector, tracking the performance of US companies in industries such as software, hardware, and IT services

NOTE: We’re not recommending you invest in these sector ETFs specifically – we’re simply giving you some examples that are popular on Pearler!

How sector ETFs operate

Much like traditional ETFs, sector ETFs pool together investors’ money to buy a portfolio of stocks. But the key difference is that all the companies belong to a specific industry. For instance, if you buy a technology sector ETF, you’re getting exposure to major tech companies like Apple, Microsoft, Nvidia , and Alphabet.

Because they’re traded on stock exchanges like the ASX , sector ETFs offer flexibility and liquidity, allowing you to buy and sell them easily throughout the trading day. Their value fluctuates based on the performance of the stocks in the chosen sector, providing both opportunities and risks depending on how that industry is performing.

You can also invest globally by putting your money into sector ETFs that track international companies or those in a specific country or region.

How traditional ETFs work

In contrast, traditional ETFs offer a broader approach by investing across multiple sectors. These funds track wide-ranging indices, such as the S&P 500, the FTSE 100 , or the Dow Jones Industrial Average – providing exposure to companies across industries like technology, healthcare, financials, and more. By doing so, traditional ETFs can give you diversified exposure to the overall market, potentially balancing risk across sectors.

For instance, an ETF that tracks the S&P 500 would hold stocks from all major sectors, so you’re less dependent on the performance of any single industry. This diversification can help reduce risk, as downturns in one sector may be offset by gains in another.

Comparing sector ETFs and traditional ETFs: which approach suits you?

While sector ETFs and traditional ETFs might seem similar at first glance, they cater to different investing strategies . The key differences lie in their levels of diversification, risk, and the type of investor they appeal to.

Diversification

• Traditional ETFs : Provide exposure across multiple sectors, which can help spread risk. If one industry underperforms, the others can potentially offset those losses
• Sector ETFs : Offer a more concentrated bet on a single industry. If that industry thrives, you may see higher returns than with a traditional ETF. However, this also means greater risk, as poor performance in that sector can significantly affect the value of your investment

Risk and volatility

• Traditional ETFs : With broad exposure to different sectors, these funds generally tend to be less volatile. Even if one sector experiences downturns, the overall impact on the ETF may be minimal, possibly providing more stable, long-term growth
• Sector ETFs : Because they concentrate on a single industry, sector ETFs may experience more volatility. For example, if you invest in an energy sector ETF and oil prices plummet, the ETF’s value could drop significantly. But if you’ve chosen a sector that outperforms the market, the potential gains could be substantial

Investing strategy

• Traditional ETFs : These funds are often used as core holdings in a portfolio, especially for passive investors seeking broad market exposure. They offer a “set it and forget it” approach, making them popular with those who seek long-term stability with lower risk
• Sector ETFs : These are often employed by more active investors who want to capitalise on trends in specific industries. Sector ETFs can be used as part of a tactical strategy, where investors may adjust their exposure based on economic conditions or market cycles

Cost

• Traditional ETFs : Generally have lower fees, as they tend to be more passively managed. They track broad indices, which means less frequent adjustments and rebalancing
• Sector ETFs : While still often affordable compared to many actively managed funds, sector ETFs may have slightly higher fees due to their more focused approach and the specialised knowledge required to manage them

When might a sector ETF make sense?

Sector ETFs aren’t a one-size-fits-all solution, but they can play an important role in specific investing strategies. Here are a few scenarios where a sector ETF might be a good fit:

• You have strong views on a specific industry : If you believe a particular sector is poised for significant growth, a sector ETF allows you to gain direct exposure to that industry
• You want to complement a broad portfolio : Sector ETFs could be used to enhance your existing portfolio. For example, if you already hold a traditional ETF that tracks the S&P 500, adding a sector ETF focused on technology could increase your exposure to that industry
• You’re looking to capitalise on market cycles : Some investors use a strategy called sector rotation, where they shift their investments between sectors based on the economic cycle. For instance, during economic growth, they might invest in consumer discretionary or technology sectors. In a downturn, they might switch to more defensive sectors like utilities or healthcare. However, we should note that we at Pearler don't generally align with this strategy, as we prefer a more passive investing approach

Finding the right fit for your portfolio

Whether you’re considering a traditional ETF or a sector ETF, the key is to understand how each fits into your overall investing strategy. Traditional ETFs seek to provide broad diversification, reducing risk and potentially offering stable, long-term growth. Sector ETFs, on the other hand, give you the chance to make more focused investments in specific industries, with the potential for higher returns – but also higher risk.

Before deciding which type of ETF is right for you , think about your financial goals, risk tolerance , and the amount of involvement you want in managing your portfolio. Sector ETFs may offer exciting opportunities for those with a clear vision of where certain industries are headed. Traditional ETFs could provide a more balanced, diversified approach for those looking for steady growth across the market.

If you’re stuck on your decision, reach out to a licensed financial adviser who can help.

Happy investing!