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Sector ETFs should be avoided by investors during a strong earnings season

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Looking to capitalize on what’s shaping up to be a strong earnings season? You may want to avoid some of the most popular vehicles in the market: large sector exchange-traded funds.

ETFs tracking all sectors have gathered a record $18.1 billion this year, with $1.4 billion coming in the past seven days alone, according to data compiled by Bloomberg.

The problem is passive ETFs that track indexes may not be ideal for the company-specific nature of earnings season, according to Andy Wester, a money manager at Proficio Capital Partners LLC.

While the diversification of funds like XLF is often seen as a benefit, performance between firms in some sectors can vary so widely that winning bets are essentially canceled out by losing ones, according to Bryan Novak, senior managing director and manager for Astor Investment Management LLC. Take retailing, for example.

Performance between industries can also differ. State Street’s Technology Select Sector SPDR Fund, symbol XLK, holds 74 companies in semiconductors, telecommunications and software. Internet companies and semiconductor producers are expected to lead first quarter earnings this year, but communications and software firms are expected to report weaker results.

Still, for all the potential hazards of sector ETFs, the funds probably are a better play during earnings season than trying to pick individual stocks, Novak said.

Source: Bloomberg

Junior Trader Ivan Ivanov


 Varchev Traders

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