Heyer Capital, LLC

investment management and timely advice from a local CPA (Fox Valley, Wisc.)

Exchange traded funds (ETF) for sector investing

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A question came from a reader: What do you think about a energy sector mutual fund?

All else being the same, I prefer ETFs over sector funds if only because I have intraday liquidity. If the sector spikes up 5% midday on a climax run, I want to be able to take some off the table; converse is true, if it’s down 5% mid-day on a capitulation I can initiate a position rather than waiting for whatever price one gets at the end of the day. If it’s down 5% and floating around the 50 day, I can take a position and hopefully pick up some cushion if it rebounds to just down 2% on the day. If I had a fund, I only get the price at the end of the day, resulting in paying a higher price for the sector exposure.

When capital is at risk in the markets, having control of it seems to be prudent.

Also, in sector investing there are only so many stocks within a group to buy. (As opposed to a general assets manager that can buy stocks in any sector or valuation, depending on how attractive it is.) There’s not a lot of ways for a sector-restrained manager to add value and pay his fees with excess returns. One trick is to take more risk than the index (leverage, weighting higher beta stocks, etc.) When it works, great. Odds are the return differential will not be worth giving up control.

That ETF in question had 24% of its assets in one stock. The return of the ETF and that stock were the same for the past three months. Be aware (Not beware) of how the tail wags the dog.


Written by heyercapital

June 5, 2007 at 8:38 pm

Posted in charting, stock ideas

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