While many investors have similar outlooks, no two are exactly alike. That’s where Select Sector SPDRs come into play. They let you select the sector or industry groups that best meet your investment goals. They can be used for asset allocation, for following industry trends or for balancing your portfolio—conveniently, efficiently and affordably. Take a look at some of the major advantages of Select Sector SPDRs.
Diversification may help to improve returns while reducing risk. However, maintaining a truly diversified stock portfolio is cost prohibitive for many investors. The creation of index funds in the 1970s allowed individuals to gain diversified exposure to a broad market segment in a cost-effective manner. ETFs improved upon the index fund concept by offering intraday trading flexibility, while maintaining the diversification benefits of mutual funds.
Select Sector SPDRs also provide diversification within a particular sector. The wide range of stocks within each sector reduces the impact that any single stock can have on the entire portfolio. You can reduce redundancy in your portfolio by excluding sectors that contain stocks you already own. In addition, any sectors in your portfolio that are under-weighted can be addressed by buying a specific Select Sector SPDR.
Investors should be aware that Select Sector SPDRs are subject to risks similar to those of holders of other sector stock portfolios. One primary consideration is that the general level of stock prices may decline, and thus the value of Select Sector SPDRs may decline. A Select Sector SPDR also may be adversely affected by the performance of the specific sector or group of industries upon which it is based. Diversification does not eliminate the risk of experiencing investment losses.
Please see more about diversification in our Asset Allocation Strategies section.
Select Sector SPDRs are designed to be cost efficient. Unlike active mutual funds, whose objective is to beat a respective index, Select Sector SPDRs are managed passively, with the objective of matching the performance of their underlying sector index. Consequently, Sector SPDRs are able to eliminate many of the operating, research and transaction expenses incurred by active money managers. These cost savings are then passed along to you, the investor, in the form of lower expense ratios.
Ordinary brokerage commissions apply when buying or selling shares of Select Sector SPDRs.
Many investors do not realize the performance impact of asset allocation. Even within a broad-based index like the S&P 500, the performance difference between sectors can be dramatic. As focused investments, Select Sector SPDRs are ideal tools to achieve varying levels of equity exposure within an Asset Allocation Strategy. By handpicking your industry and sector exposure, you can customize the performance of your portfolio. Asset Allocation cannot assure a profit nor protect against a loss.
Select Sector SPDRs are designed to be tax-efficient investments. As an investor in the funds, you are shielded in two ways from many of the tax burdens commonly found in actively managed mutual funds.
Portfolio turnover, a major factor in generating capital gains for actively managed mutual funds, occurs when managers buy and sell securities. These portfolio transactions, however, in the Select Sector SPDRs only occur when changes are made to the underlying index, or when needed to maintain diversification requirements. Infrequent changes to the portfolio result in lower portfolio turnover, and a lower potential for capital gains.
Unlike conventional mutual funds, ETF shareholders are insulated from taxable events generated by other shareholders in the fund. When mutual fund shareholders redeem shares, they are paid directly by the fund company. If the fund company must raise cash to pay for shareholder redemptions, this cash is generated by the sale of portfolio securities. If the fund company realizes a gain on these sales, the gains are passed on directly to the shareholders. In other words, the actions of other shareholders may result in your tax liability!
Select Sector SPDR investors transact with one another via brokers on the stock exchange, instead of directly with the fund company. All share activity with the Trust is facilitated via in-kind transfers with institutional investors, a process called the Creation/Redemption Process. This procedure essentially prevents the fund from incurring capital gains as the result of shareholder trades. The increased tax efficiency of ETFs, even in comparison to index mutual funds, makes them a viable option for those who seek to diminish the effects of taxes on their investments.
Select Sector SPDRs are traded on NYSE Arca, and, as a result, can be bought and sold with the same flexibility as individual stocks. For example, you can trade Select Sector SPDRs throughout the day, as well as place stop, limit or market orders. The Select Sector SPDRs Funds are subject to investment risks similar to those of stocks, including risk associated with short-selling and margin account maintenance.
You can sell Select Sector SPDRs short on a down-tick. This flexibility allows you to hedge long-term positions in a specific sector even in a falling market. The relatively low outlay of cash required to purchase ETFs in comparison with other derivative instruments also makes them a prudent hedging vehicle for smaller portfolios.
Options are available on all ten Select Sector SPDRs and are traded on NYSE Arca and Chicago Board Options Exchange. Please see more about using Select Sector SPDRs as a hedging vehicle in our Hedging Strategies section.
Select Sector SPDRs can be bought on margin, generally subject to the same terms that apply to common stocks.
Select Sector SPDRs offer you the convenience of investing in portfolios of stocks included in any of the ten Select Sector Indexes with just one transaction. The composition of the Select Sector Indexes is available in the Index Components section — so you’ll know how your money is invested.
With Select Sector SPDRs, you know exactly the companies in which you are investing. The Holdings of Each Select Sector SPDR Index are available on a daily basis. Meanwhile, active mutual funds generally reveal their entire holdings quarterly, which can leave you guessing about how closely the fund manager is sticking to the objectives and style of the fund.
The transparency of the portfolio also facilitates the use of Select Sector SPDRs as hedging vehicles for both institutional and individual investors. By knowing exactly what stocks make up each Select Sector SPDR, individuals, traders and hedge fund managers alike can easily obtain or hedge exposure to a specific group of securities.
Dividends from the underlying securities are reinvested back into Select Sector SPDRs. The Select Sector SPDRs pay dividends to shareholders quarterly. The Select Sector SPDR Trust allows shareholders to reinvest these dividends, rather than receive them in cash, provided their brokerage firm makes the reinvestment option available. By reinvesting dividends back into the funds, Select Sector SPDRs are more able to fully replicate the underlying index.
You won't have to wait until the end of the trading day to purchase or sell Select Sector SPDRs. They're listed and traded on NYSE Arca - so it's easy for you to buy or sell shares throughout the trading day. This intraday trading gives you the power to react swiftly to market changes. And because the pricing of Select Sector SPDRs is continuous during market trading hours, you'll always be able to obtain up-to-the-minute share prices.