How To Find The Best Sector ETFs 1Q23

With an ever-growing list of similar-sounding ETFs to choose from, finding the best is an increasingly difficult task. How can investors shift the odds in their favor?

Don’t Trust ETF Labels

There are at least 79 different Technology ETFs and at least 287 ETFs across eleven sectors. Do investors need 26+ choices on average per sector? How different can the ETFs be?

Those 79 Technology ETFs are very different from each other. With anywhere from 22 to 562 holdings, many of these ETFs have drastically different portfolios with differing risk profiles and performance outlooks.

The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last.

Avoiding Analysis Paralysis

I think the large number of sector ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option. As a result, investors conduct insufficient analysis and miss profitable opportunities. Analyzing ETFs with the proper diligence is far more complex than analyzing stocks because it involves analyzing all holdings within each ETF. As stated above, there can be as many as 562 stocks or more for one ETF.

Figure 1 shows the top-rated ETF for each sector.

Figure 1: The Best ETF in Each Sector

* Best ETFs excludes ETFs with Total Net Assets (TNA) under $100 million due to inadequate liquidity

Sources: New Constructs, LLC and company filings

Amongst the ETFs in Figure 1, VanEck Steel ETF (SLX) ranks first overall, iShares U.S. Home Construction ETF ITB
ranks second, and Invesco KBW Bank ETF KBWB
ranks third. VanEck Mortgage REIT Income ETF MORT
ranks last.

How to Avoid “The Danger Within”

Why do you need to know the holdings of ETFs before you buy?

You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad.

PERFORMANCE OF FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

VanEck Steel ETF (SLX) is not only the top-rated Basic Materials ETF but is also the overall top-rated sector ETF out of the 287 sector ETFs that my firm covers.

The worst ETF in Figure 1 is VanEck Mortgage REIT Income ETF (MORT), which gets an Unattractive rating. One would think ETF providers could do better for this sector.

Disclosure: David Trainer, Kyle Guske II, and Italo Mendonça receive no compensation to write about any specific stock, sector, or theme.