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SPDRs: Sector SPDRs Getting Popular With Investors

If you're a long time fund investor, you've noticed that sector funds can be stellar performers. But finding the right sector to invest in, selecting the appropriate fund and then snagging profits before they've vanished can be tricky.

But there is another way to play the sector game: sector exchange traded funds.

Exchange traded funds (ETFs) have been around since 1993. When first introduced, each represented a basket of securities designed to track an index. But thanks to their popularity, ETFs have grown in number and type over the years. Then in 1998, sector exchange traded funds were created allowing investors to be able to invest in specific stock industry sectors.

One of the beauties of all ETFs is that, unlike open-end mutual funds (the kinds most of us invest in), each trades as stocks do---on an exchange all day long. That means you can buy and sell an ETF any time of the business day you choose. Keep in mind, each buy or sell order requires paying a commission.

Among sector ETFs, the most popular are the various iShares and Select Sector products and interest in each brand name has been growing in leaps and bounds.

"In the last 12 months, assets have doubled in both Select Sector SPDRs (Standard & Poor's Depositary Receipt) and iShares, " says Dan Dolan, wealth management strategist for Select Sector SPDR Trust. " So, Select SPDRs have gone from $2.5 billion to $5 billion and sector iShares from 1.2 billion to $2,5 billion."

The Select SPDRs that Dolan sites are ETFs that divide the S&P 500 into nine different sector fund categories. Those categories include: The Consumer Discretionary Select Sector SPDR Fund; the Consumer Staples SPDR; the Energy SPDR; the Financial SPDR; the Health Care SPDR; the Industrial SPDR; the Materials SPDR; the Technology SPDR and the Utilities SPDR.

Because there are a number of different stocks within the various sector industries, each SPDR represents a diversified basket of stocks from its respective sector.

Here's more about SPDRs from Dolan:

Q: Why were Sector Select SPDRs created?

A: The real intention is to give you tools to build and manage portfolios.So an individual can now buy a number of sectors SPDRs and use them in conjunction with other holdings in their portfolios.

Q: How popular are SDPRs with individual investors?

A: About 60 percent are institutionally held and 40 percent are in individual accounts.

Q: Since the sector SPDRs carve the S&P 500 into nine different funds, do you have any investment strategy ideas?

A: Be cautious about being too overweighted in any one sector. You probably don't want to own just one sector. If you owned all nine sectors you'd own the S&P 500, which you probably wouldn't want to do either.

But the S&P 500 represents a diversified large-cap portfolio. And if you wanted to customize your portfolio based upon a few sectors within that index, SPDRs allow you to do that.

Our Utilities Sector SPDR has become very popular. There are 37 different stocks in it and what's nice about it is the utility sector consistently is the highest yielding sector of the S&P 500. It probably yields over 4 percent.

Now that the tax rate on dividends was just reduced to 15 percent, you have this great tax break opportunity which I believe most people aren't fully aware of. So, if you look at the interest income from a bond, you're going to be taxed at your ordinary income rate. In a high income bracket that's 35 percent.

With a 15 percent tax break in a taxable account, you're going to keep more of your dividend income than you would your interest income. So we've seen a huge increase in demand on the utility SPDR from individuals.

Q: What are some of the differences between Select Sector SPDRs and sector iShares?

A: iShares don't divvy up the S&P 500. They use Dow Jones sectors. And, there are also differences in expenses. SPDRs carry an annual expenses of 28 basis points where with sector iShares expenses are 60 basis points.

The ETF subject is a vast one and to learn more about them, visit www.amex.com the click-on ETFs on the left side of that home page. To learn more Select Sector SPDRs, visit www.spdrindex.com.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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