ETF providers wade into global sectors

SPDR, Amundi and Source have all brought out new ranges targeting different segments of the MSCI World Index, including MSCI World Financials, Consumer Discretionary and Healthcare. Over the same period Deutsche Bank Asset management has also converted 10 of its world sector ETFs, which were originally launched in 2011, from synthetic to physical replication. These ETFs now buy shares in the indices they track, rather than replicating the return using derivatives.

Following these launches and changes UK investors now have more choice in how they target specific sectors within emerging markets, Europe, US and global indices.

However despite the popularity among providers, targeting specific sectors within a broad index results in the concentration of risk in a group of stocks likely to suffer at the same time if hit by a shift in sentiment or a regulatory issue.

The new ETFs are also likely to be relatively small compared with broader ETFs tracking a greater number of countries and sectors, making the gap between the buy and sell prices (the bid-offer spread) higher.

Typically these funds also have higher ongoing charges than broader ETFs, although increased competition in this area has brought this down. Of the new ETFs launched between April and May, ongoing charges range from 0.25 per cent, in the case of Amundi S&P Global Luxury (LUXG), to 0.45 per cent for the re-listed db X-trackers range, which includes db x-trackers MSCI World Industrials (XDWI) and db x-trackers MSCI World Utilities (XDWU). Vanguard S&P 500 UCITs ETF (VUSA), by contrast, has an ongoing charge of just 0.07 per cent.

Competition in European and US sectors has meant that ETFs tracking indices such as MSCI Europe Financials and S&P 500 Financials, are now cheaper and larger in assets under management than several years ago, making them more compelling in terms of both trading costs and headline fees.

Sector investing is a more tactical play than taking out broad market exposure and timing is key to returns. In recent years stocks in the consumer staples and discretionary sectors have performed well due to income investors flocking to them for dividends in a climate of low interest rates. However in the past month that trend has reversed in Europe and the UK, with financials starting to pull ahead on the back of investors seeking higher returns from higher-risk but lower cost sectors.

MSCI WORLD SECTORS RANKED

Best long-term performers

Best short-term performers

Source: FE Analytics, as at 10.05.16, from 10 total sectors now tracked by SPDR ETFs