Ford’s Model T was the car that “put America on wheels”. ETFs were the vehicle that brought sector investing from Wall Street to Main Street.
Sector bets with individual stocks have been littered with land mines. A few of them that have already blown up include: Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Washington Mutual, AIG and Wachovia. Any investment in the foregoing would have been punished with a 90-plus percent loss.
The Vanguard Financial ETF (VFH), a collection of 497 financial names is down about 55 percent. Losses always hurt, regardless of the size. Investing via sector ETFs however, effectively illustrates the power of diversification.
The Consumer Staples Select Sector SPDRs (XLP) includes stellar performers such as Wal-Mart (up 15 percent) and losing proposition such as Pepsi (down 30 percent). But most importantly it includes 41 additional companies ranging from Proctor & Gamble to Whole Foods.
There is safety in numbers.