Within all of these different sectors are many different subsectors that can get even more specific, but these are the main 11 categories that the stock market is broken up into.<\/p>\n\n\n\n
Seeking Alpha<\/a> has a pretty nice breakdown of some of the ETFs that you can pick if you wanted to invest in a particular sector:<\/p>\n\n\n\n One thing about ETF investing, however, is that you can always find tons of different ETFs that essentially accomplish the same goal. This is nice because you can essentially price shop by finding the lowest expense ratio but also, I have found that the ETFs are all just slightly different in how they operate.<\/p>\n\n\n\n Anytime I want to find specific information on ETFs, I always go to ETF.com<\/a> because it\u2019s such a large database of all the information that anyone could possibly want with an ETF. I find it extremely helpful as I can search any and all ETFs to find their holdings, performance, expense ratios, etc.<\/p>\n\n\n\n When I type \u201cConsumer Discretionary\u201d into the search bar, I get 48 different ETFs that would fall into this category:<\/p>\n\n\n\n\n\n\n\n Admittedly, this can be extremely overwhelming and make you immediately exit the screen. I have done that before.<\/p>\n\n\n\n Performing analysis on an ETF can be even harder than doing so on a stock because there are so many different variations of what you\u2019re likely looking for.<\/p>\n\n\n\n You can see that they have general descriptions in the Fund Name column that can help guide you, but in general, I will look at the AUM, or Assets Under Management, to get an idea of just how big that ETF is.<\/p>\n\n\n\n Typically, the larger the ETF is, the more mainstream it is, and less likely to be niche. AKA \u2013 if you\u2019re looking to get all of the consumer discretionary companies in the stock market, it\u2019s likely going to be in an ETF that has a higher AUM.<\/p>\n\n\n\n You can see the top two ETFs both explicitly say \u201cConsumer Discretionary\u201d in them, meaning they likely are just grabbing that sector of companies.<\/p>\n\n\n\n Sure enough, when I click on XLY<\/a> I can see that the description tells me exactly what I assumed:<\/p>\n\n\n\n Just as I did this for consumer discretionary, you can do it for any sector of the stock market to find an ETF that matches the industry that you\u2019re looking for exposure to.<\/p>\n\n\n\n Now, the Investing for Beginners gang is primarily focused on finding companies that are undervalued vs. their intrinsic value, aka value investing.<\/p>\n\n\n\n How can you find an ETF that is undervalued?<\/p>\n\n\n\n Some people say that the easiest way to do this is to simply look at the price performance of that ETF over recent history. Personally, I\u2019m not sure I agree with this. To me, investing in an ETF with a specific strategy is nearly impossible to accomplish.<\/p>\n\n\n\n Within any industry, you\u2019re going to have some companies that fall into the value bucket while some are growth. Does 75% value and 25% growth mean it\u2019s better? Worse? Who knows honestly? I mean the value vs. growth debate<\/a> is one that is perpetually ongoing with no end in sight because of the cyclicality of stocks.<\/p>\n\n\n\n In my opinion, there are three reasons<\/span> to invest in ETFs:<\/p>\n\n\n\n 1 \u2013 Stability in your portfolio<\/strong><\/p>\n\n\n\n Investing in an ETF will bring you stability as you\u2019re investing in many different companies rather than one company. If you invested in a company and it went bankrupt, you lost your investment. If you had invested in an ETF, that investment would drop slightly but you\u2019d still have a majority of your investment.<\/p>\n\n\n\n On the other hand, \u201cstability\u201d is going to cost you upside in investing. If you invested in a company that became a tenbagger<\/a>, your investment is now worth 10X. If you owned an ETF, your investment went up slightly because you only own a small amount of that company.<\/p>\n\n\n\n ETFs minimize risk. That might be good or might be bad \u2013 100% depends on your investing philosophy.<\/p>\n\n\n\n 2 \u2013 You want to be hands-off<\/strong><\/p>\n\n\n\n You can simply dollar cost average<\/a> into your ETF on a ratable basis without doing analysis. Just keep throwing money in blindly and watch your account balance grow.<\/p>\n\n\n\n Now, I do think that this might be slowly leading us towards an ETF bubble<\/a> solely because of the nature of how some people use ETFs, but as long as you keep adding you\u2019re going to be just fine. Your returns might be less than others picking individual stocks, but nobody ever went broke by investing in ETFs.<\/p>\n\n\n\n 3 \u2013 You want exposure to a new market<\/strong><\/p>\n\n\n\n This is my #1 reason to invest in ETFs. I will invest in an ETF like WCLD to get cloud computing exposure<\/a> or GLD to get exposure to Gold<\/a> before buying individual companies. <\/p>\n\n\n\n Basically, I get some skin in the game and then I try to learn more about these companies and use my stock picking process<\/a> to pick out stocks that I think are going to be winners. <\/p>\n\n\n\n Notice how I didn\u2019t say that I invest in ETFs to get the biggest return possible? I just don\u2019t think that\u2019s how ETFs are meant to be structured, but I actually have heard some recent opinions that I want to put to the test.<\/p>\n\n\n\n I have heard two different philosophies recently focused on buying ETFs based on how they have performed lately.<\/p>\n\n\n\n Basically, there was a value and then a momentum philosophy. Value was that if you bought the worst performing sector in a year and then held it for the next year, you would beat the market.<\/p>\n\n\n\n The momentum strategy was the same but opposite \u2013 buy the best performing sector and hold it for the next year.<\/p>\n\n\n\n The Novel Investor<\/a> has this really cool, interactive chart that shows us how the different sectors have performed since 2007, shown below:<\/p>\n\n\n\n I like how they ranked the different sector and then shaded them as well. Well, you all know me \u2013 I had to immediately go to Excel and start to crunch some of the numbers myself.<\/p>\n\n\n\n Below shows the chart of each sector by year compared to the S&P 500:<\/p>\n\n\n\n This is great info but at the end of the day, we really just want to see how the sectors actually compared to the S&P 500, right?<\/p>\n\n\n\n Below shows what would\u2019ve happened if you invested $10K into each sector, as well as the S&P 500, starting in 2008:<\/p>\n\n\n\n As you can see, the S&P 500 had a pretty nice return of turning that $10K into nearly $34K. Now, it\u2019s important to note that this doesn\u2019t include dividends whatsoever \u2013 purely price performance.<\/p>\n\n\n\n At the end of the day, there were 4 sectors that outperformed the S&P 500 while 7 underperformed. INFT, or Information Technology led the pace and essentially doubled up the S&P 500 while ENRS, the Energy sector, lost 32% of the initial investment!<\/p>\n\n\n\n But what happens if we try these two different strategies that I mentioned where we buy the best or worst performing sector for the following year?<\/p>\n\n\n\n Let\u2019s start with the \u201cvalue\u201d approach of buying the worst performing sector. Below is a chart that shows the worst performing sector in a particular year and then the investment that you would\u2019ve made during that time:<\/p>\n\n\n\n For instance, you can see that in 2007, the worst sector was Financials at an abysmal return of -18.6%. That\u2019s so bad it\u2019s hard to even use the word return<\/em> to describe it!<\/p>\n\n\n\n But wait \u2013 it gets worse! The next year you invest in Financials again because it was the worst sector and your return is -55.3%. Sad Face.<\/p>\n\n\n\n Ok \u2013 let\u2019s run it back again with the financials. Wow, a nice return of 17.6%! Well above the normal S&P 500 average return of 10%. WINNING!<\/p>\n\n\n\n But wait \u2013 the S&P 500 return that year was over 26%. So, yet another loss. Things aren\u2019t looking great anymore.<\/p>\n\n\n\n If you\u2019d keep this up through 2020 you would end up with $10,616 \u2013 a massive underperformance vs. the S&P 500:<\/p>\n\n\n\n Not only that, but this strategy actually underperformed every single sector except for Energy. Seems like doing this is a massive, massive failure.<\/p>\n\n\n\n \u201cBut Andy, we have been in a 10-year bull market where growth and momentum have ruled!\u201d<\/p>\n\n\n\n You\u2019re completely right. Value has been a major drag in the 2010\u2019s. Does the momentum and growth strategy end up looking better than value?<\/p>\n\n\n\n Below shows the best performing sector each year and the performance if you had invested the following year:<\/p>\n\n\n\n That 2008 year immediately sticks out to me as a massive failure but when I look further, it actually beat the S&P 500 that year.<\/p>\n\n\n\n Seems weird that losing 35% can beat the stock market as a whole, but that\u2019s why I preach the importance of benchmarking your performance against an index<\/a>, such as the S&P 500 which is what I use.<\/p>\n\n\n\n If you can get into the mindset that the S&P 500 is your \u201calternative\u201d, or my view as the risk-free rate, then you\u2019re going to be much calmer about major swings in your account.<\/p>\n\n\n\n If you can get to the mindset that the stock market is going to do what it\u2019s going to do and instead just focus on beating the market, you\u2019ll be much better off.<\/p>\n\n\n\n You\u2019ll find yourself being happy when you lose 10% and the market loses 12%, just as you\u2019ll be disappointed when the market gains 12% and you gain 10%. It\u2019s the mindset and the healthy one to have!<\/p>\n\n\n\n Sorry for the tangent \u2013 let\u2019s get to the results!<\/p>\n\n\n\n![\"\"](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2021\/02\/image-13.png?strip=all&lossy=1&ssl=1\")
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