Three exchange-traded fund (ETF) experts took a closer look at sector-specific ETFs during Charles Schwab’s “Every Third Friday” media call on Friday.
The takeaways? Tactical investors may want to take a neutral stance due to market uncertainty. Schwab is overweight in the information technology sector. Real estate ETFs are the most popular sector ETF so far this year, while Schwab Advisor Services has captured about 45% of all sector ETF inflows year to date. And finally, when in doubt, research, research, research.
Here are the highlights:
1) Brad Sorensen, managing director and sector analysis, Schwab Center for Financial Research
Looking at tactical investing ideas, Sorensen said that now is certainly an interesting time in the markets. “We’ve reverted back to what we saw in 2010 and 2011, with risk-on, risk-off trading rather than specific sector fundamentals being the focus,” Sorenson said. “Investors have taken money out of the more aggressive sectors and put it into more defensive sectors and vice versa as optimism has grown. We’ve seen some of those more cyclical sectors perform better, so it’s been frustrating for sector investors who do tactical allocations that there’s a lot of underlying sector fundamentals that have returned to being ignored while the focus is on the major macro events.”
What’s Sorensen’s advice for investors? Stay relatively neutral. “It’s an uncertain time,” he said. “We don’t want to make huge bets one way or another.”
Schwab has moved into a more defensive position just this week on sector calls. Mostly neutral on most sectors, Schwab has moved its view of the cyclical industrials sector down to Underperform from Market Perform, and has moved utilities to Market Perform from Underperform. Schwab’s view remains Outperform on information technology.
“It’s a barbell approach that has a little bit of a defensive flavor,” Sorensen said. “As we’ve seen in past years when there’s been a downturn, information technology has held up relatively well. They’re increasing their dividend payments and their balance sheets are extremely solid with large cash balances, and businesses are willing to spend first on productivity-enhancing items rather than on labor.” 2) Eric Pollackov, managing director, ETF Capital Markets, Charles Schwab
Turning to asset growth among Schwab clients in sector ETFs this year, Pollackov said growth is flat as of the end of the May. Sector ETFs account for about 13% of the ETF assets at Charles Schwab, and they captured about 18% of the net flows year to date. Meanwhile, Schwab Advisor Services has captured about 45% of those sector ETF inflows year to date and account for 49% of the sector ETF assets.