Sector and thematic ETFs (exchange-traded funds) can be a great way for passive investors to spice up their portfolios and add more of a unique touch. Of course, you could stop at broad index funds if you like to keep things cheap, simple, and, perhaps most importantly, hands-off as you systematically invest, regardless of how investors are feeling or what the market has been doing of late.
However, for passive investors who want to customize their sector allocation (let’s say you want a bit more tech exposure than the S&P 500 offers to gain more exposure to the ongoing AI race), Vanguard sector ETFs can help you achieve your desired sector allocation at a rock-bottom price.
Sure, Vanguard founder and “father of index investing,” John C. Bogle, may not have been the biggest fan of sector or thematic ETF products in the world. Still, I see a lot of utility in embracing such funds, especially if you consider yourself an “active” passive investor.
The benefits of sector ETFs
Indeed, it wasn’t too long ago that such sector-specific ETFs were deemed just a bit too pricey, at least compared to vanilla total-market Vanguard index ETFs. The price of sector ETFs has come down by a great deal. And while they’re still not as cheap as a Vanguard S&P 500 index ETF, they are still pretty inexpensive. I’d argue that the slightly higher gross expense ratio is worth paying if you’re looking for more of an industry edge. Of course, do remember that over-concentration in one specific sector carries a more significant risk.
So, if you’re looking to double down on tech, do be ready for the higher peaks but also lower troughs. At the same time, using sector ETFs could be a way to further diversify your portfolio away from a particular choppy or risky sector. Indeed, the S&P 500 already has a good amount of tech exposure. So, if you’re looking to beef up your consumer staple or financial exposure, you may very well make your portfolio even better-rounded!
Let’s check in on two sector ETFs worth exploring, whether you’re looking for a tech jolt, a less-volatile ride for the year, or see deep value in an unloved sector of the market:
Vanguard Consumer Staples ETF
If you want to de-risk your portfolio, the incredibly inexpensive (0.09% expense ratio, just marginally higher than a more broad-based Vanguard ETF) Vanguard Consumer Staples Index ETF (NYSEARCA:VDC) is a fantastic option. It not only possesses a lower beta (0.60), making it less likely to slide on those nasty dips, but it’s also richer in yield (2.33%).
Sure, it may not have the cheapest names within the space, but the top holdings are profoundly strong, with Costco Wholesale (NASDAQ:COST) and Walmart (NYSE:WMT), the “big two” champions in retail, comprising the top two spots in the ETF, with 13% and 12.7% weights, respectively.
I don’t know about you, but I want such high-quality blue chips at my portfolio’s core, even if the price of admission is a tad on the high side. At the end of the day, premier companies deserve a premier price tag. With some rock-solid companies in the fund, the VDC ought to be a staple for any passive investor looking to play it a tad more defensively in 2025.
Vanguard Health Care ETF
Speaking of defense, the Vanguard Health Care ETF (NYSEARCA:VHT), also with a 0.09% expense ratio, is another fantastic way to add exposure to what I believe is one of the least-respected sectors on the market right now. With the VHT, you’re gaining a near-20% exposure to biotech, 20% in health equipment makers, and around 27% to pharmaceuticals.
Indeed, it’s a well-rounded ETF that provides broad exposure to the health universe. With a 0.69 beta and a 1.53% yield, you’re also insulating your portfolio from those rough market-wide moves. And with a rather muted past two years of gains (11%), perhaps there’s more runway for health than the rest of the market, which has been hot and a tad too heavy in tech amid the AI bull run.
The bottom line
If you’re targeting specific sectors with your portfolio, do ensure to have sufficient diversification. Chasing hot sectors could lead to less-than-stellar results. At the same time, there are benefits to overweighting various sectors that are richer with value and dividends while being lower in beta. As always, maintain balance and play the long game!
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