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How to Select ETFs by Sector, Not Style

There are about 200 U.S. industry-sector ETFs. You can find a fund to mirror each of the major industry sectors in the U.S. economy: energy, basic materials, financial services, consumer goods, and so on.

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Based on the breakdown of the MSCI U.S. Broad Market Index, this chart reveals the size of ten major industry sectors of the U.S. economy. What you’re seeing is the total capitalization (value of stock) of all public companies within each industry group. Note: No standard methodology exists for breaking up the U.S. industry into sectors; MSCI does it one way, and S&P does it a slightly different way.

Some ETFs mirror subsections of the economy, such as semiconductors (a subset of information technology) and biotechnology (a subset of healthcare). In some cases, subsectors of the economy you may not even know exist — such as nanotech, cloud computing, and water resources — are represented with ETFs!

A good number of newer ETFs allow you to invest in industry sectors in foreign countries or in global industries. About 150 international and global sector ETFs are available.

Note that one of the biggest differences between the U.S. chart and the global chart is the portion of the pie that goes to healthcare. Only in the United States does a trip to the dermatologist affect the national economy!

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Certain newer ETFs — such as the PowerShares S&P SmallCap Industrials Portfolio ETF (PSCI) or the PowerShares S&P SmallCap Health Care Portfolio ETF (PSCH) — allow you to invest in industry sectors and styles at the same time.

And finally, the living proof that you can, if you so wish, slice and dice a portfolio to ultimate death: You can even find some ETFs that allow you to buy into a particular industry within a particular country. Examples include the Global X Brazil Financials ETF (BRAF) and Global X China Technology ETF (CHIB).

Unless you have a really compelling reason to purchase such a specialized fund (and pay the hefty expenses and subject your portfolio to excess concentration), you should probably avoid this option.

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