How To Find The Best Sector ETFs 3Q24

With an ever-growing list of similar-sounding sector ETFs to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?

Don’t Trust Sector ETF Labels

There are at least 93 different Technology ETFs and at least 325 ETFs across eleven sectors. Do investors need 29+ choices on average per sector? How different can the ETFs be?

Those 93 Technology ETFs are very different from each other. With anywhere from 22 to 439 holdings, many of these Technology ETFs have drastically different portfolios with differing risk profiles and performance outlooks.

The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last.

Avoiding Analysis Paralysis

I think the large number of sector ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing ETFs, with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, there can be as many 439 stocks or more for one ETF.

Figure 1 shows the top-rated ETF for each sector.

Figure 1: The Best ETF in Each Sector

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity

Amongst the ETFs in Figure 1, iShares U.S. Oil & Gas Exploration & Production ETF (
iShares U.S. Oil & Gas Exploration & Production ETF
) ranks first overall, Invesco KBW Bank ETF (
Invesco KBW Bank ETF
) ranks second, and iShares U.S. Consumer Staples ETF (
iShares US Consumer Goods ETF
) ranks third. Fidelity MSCI Utilities Index ETF (
Fidelity MSCI Utilities Index ETF
) ranks last.

How to Avoid “The Danger Within”

Why do you need to know the holdings of ETFs before you buy?

You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad.

PERFORMANCE OF FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND

If Only Investors Could Find Sector ETFs Rated by Their Holdings

iShares U.S. Oil & Gas Exploration & Production ETF (IEO) is not only the top-rated Energy ETF but is also the overall top-ranked sector ETF out of the 325 sector ETFs that my firm covers.

The worst ETF in Figure 1 is Fidelity MSCI Utilities Index ETF (FUTY) which gets a Very Unattractive rating. One would think ETF providers could do better for this sector.

Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, sector, or theme.