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Exclusionary Tactics With New S&P 500 ETFs

by
September 25, 2015 7:32 am
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Recent history shows that various market crises have been caused by severe downturns in one sector. Earlier this century, it was the technology/dot-com bubble bursting. In 2008, it was the collapse of the financial services sector that triggered the Great Recession.

Though the jury is still out, some market observers are wondering, and rightfully so, if the combination of plunging oil prices and increased debt defaults by energy issuers could spark more broader market problems. With history in mind, investors might be relieved to know some new exchange traded funds exclude particular sectors while delivering the remaining parts of the S&P 500.

ProShares, the largest issuer of inverse and leveraged ETFs, continued expanding its lineup of traditional beta funds on Thursday with the introduction of four S&P 500 Ex Sector ETFs. Each serves up the S&P 500 without exposure to a sector: energy, financials, technology or healthcare.

Related Link: Slowing Buybacks Drag On Buyback ETFs

The ProShares S&P 500 Ex-Technology ETF (NYSE: SPXT) is the new ETF that might prompt those of us old enough to remember the bursting of the dot-com bubble to say, “Gee, where was this ETF in 1999 or 2000?”

The S&P 500 came into Thursday with an almost 20.4 percent weight to tech stocks and three of the U.S. benchmark's top 10 holdings hail from that sector. By excluding tech and telecom stocks, SPXT's weight to financial services stocks is almost 21.5 percent, or more than 500 basis points above the traditional S&P 500's weight to that sector. Health care jumps to almost 19.7 percent in SPXT from 15.2 percent in the S&P 500.

The ProShares S&P 500 Ex-Financials ETF (NYSE: SPXN) is the ETF bound to have some investors saying “Where was this thing in 2007?” By excluding financial services, the traditional S&P 500's second-largest sector weight, SPXN's tech allocation is 360 basis points larger than the S&P 500. Additionally, the ex-financials ETF has bigger weights to Apple Inc. (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT) than do standard S&P 500 ETFs. SPXN's health care allocation is 300 basis points above the S&P 500's.

Speaking of healthcare, the S&P 500 Ex-Health Care ETF (NYSE: SPXV) could be an idea for those betting on a bursting of a biotech bubble or staffers on the Clinton campaign.

By excluding the S&P 500's third-largest sector weight, SPXV's tech and financial services allocations are well above the standard benchmark. Without healthcare stocks, SPXV's consumer discretionary and industrial exposures are also well above the S&P 500, making the new ETF a more cyclical play than the usual S&P 500 index fund.

Assuming things get worse in the energy patch, the ProShares S&P 500 Ex-Energy ETF (NYSE: SPXE) could be the most appropriate of the four new funds for the current environment. Rapid erosion in the energy sector's market value has forced the group to seventh spot in the regular S&P 500 at a weight of just under 7 percent.

SPXE redistributes most of that 7 percent to tech, financials, healthcare and discretionary names. Energy is the worst-performing sector in the S&P 500 this year.


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