Investing in Sector ETFs

Investors shouldn't put all their eggs in one basket. Diversifying your investment portfolio can help to reduce risk and boost potential long-term returns. Sector-tracking exchange-traded funds (ETFs) can ensure you're investing in a variety of assets while maintaining a targeted approach.

These innovative financial instruments allow you to invest in a specific market sector, exposing you to a group of stocks that closely track your chosen industry or sub-industry. With sector ETFs, you can trade focused sectors with ease, taking advantage of sector-specific trends and opportunities for profit.

Market sectors are a way to organize the stock market into groups based on the nature of the businesses or industries in which the companies operate. The Global Industry Classification Standard (GICS) is the most widely used system for categorizing market sectors. It includes 11 sectors, such as information technology, real estate, and healthcare.

You can put your money to work in specific market sectors through sector ETFs. Let's have a look at some of the most popular sector ETFs tracking each of the 11 GICS sectors.

You'll often see State Street's (STT -2.05%) S&P Depositary Receipts (SPDR), the Vanguard Group, and BlackRock's (BLK -2.46%) iShares funds in this list -- and for good reason. The three fund families come with market-leading scale and investor interest, and their management fees are among the lowest in the industry.

The three leading fund managers are not exactly the same, though. Their top sector ETFs often track subtly different sector indexes, resulting in different performance profiles. So, even with these top-shelf fund managers, you want to closely examine the available choices before picking a particular sector ETF. And the quality check only grows more important if you're considering a less familiar fund family.

Top sector ETFs

15 top sector ETFs in 11 GICS sectors

Technology

Best technology sector ETFs

The Vanguard Information Technology ETF mirrors the MSCI (MSCI -2.42%) US Investable Market Information Technology 25/50 index. In turn, the index tracks more than 310 stocks in the GICS technology sector.

The Vanguard fund's counterpart from the SPDR family focuses on GICS technology stocks in the S&P 500 (SNPINDEX:^GSPC) index instead -- a different index with a similar focus. That's a shorter list with roughly 70 names.

The top 10 holdings (by index weight and total market value of the holdings) of the ETFs are often identical, currently led by Apple (AAPL -3.82%) and Nvidia (NVDA -7.03%). However, the different index structures can result in some shuffling among the ranks.

Healthcare

Best healthcare sector ETFs

In the healthcare market, the Vanguard Health ETF replicates a sector index from the MSCI. Among about 420 stocks in this portfolio, the two largest positions are sector giants Eli Lilly (LLY -2.94%) and UnitedHealth Group (UNH 0.3%). This pair accounts for almost 19% of the total holdings -- a common pattern in indexes and funds weighted by market-cap values.

Consumer discretionary

Best consumer discretionary sector ETFs

The normal pattern continues: Amazon (AMZN -2.58%) and Tesla (TSLA -5.06%) are by far the largest investments in the Consumer Discretionary Select Sector SPDR. However, I'm painting outside the lines with the iShares name this time.

As the fund name suggests, the iShares Expanded Tech Sector ETF combines names from the technology, communication services, and consumer discretionary GICS sectors. The resulting stock list is distinctly different from the approach of the corresponding SPDR fund.

Financial

Best financial sector ETFs

Don't worry -- you'll see some different fund managers soon. However, SPDR is a top fund manager in yet another sector, with the Financial Select Sector SPDR. Top holdings Berkshire Hathaway (BRK.B -2.13%) and JPMorgan Chase (JPM -1.47%) account for about 23% of this massive fund.

Communications

Best communication services sector ETFs

The more things change, the more they stay the same, as the Vanguard Communication Services fund squares off against the Communication Services Select Sector SPDR. As expected, those fund families are starting to sound familiar.

Meta Platforms (META -3.54%) tops both lists, followed by Alphabet (GOOG -1.92%) (GOOGL -1.85%) and Netflix (NFLX -1.4%). In this sector, Vanguard's top ETF tracks a communication services index by MSCI, while the SPDR fund reflects a similar index from S&P Global (SPGI -1.31%). Their asset lists have some differences, and their returns are easy to tell apart in a comparative 10-year chart.

Industrials

Best industrials sector ETFs

I chose the Industrial Select Sector SPDR fund for this sector, featuring almost 80 stocks with a focus on aerospace, defense, and heavy machinery. These three subsectors represent almost half of the fund's total assets.

Consumer staples

Best consumer staples sector ETFs

Let's switch things up in my last pair of sector-specific fund alternatives. The iShares US Consumer Staples ETF holds 55 consumer staples stocks found in the Russell 1000 market index. By contrast, Fidelity (FNF -1.6%) selected a targeted MSCI index in the same category to inform its Fidelity MSCI Consumer Staples fund.

The two stock lists are quite different. The two largest holdings in the Fidelity fund are Costco Wholesale (COST -0.78%) and Walmart (WMT -2.95%), but the iShares ETF largely avoids the retail sector.

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Energy

Best energy sector ETFs

The Energy Select Sector SPDR fund offers a generous dividend yield and robust long-term returns. Its list of just 34 names is tightly focused compared to more than 70 stocks in competing ETFs from Vanguard and Fidelity, but all three options deliver similar performance.