ZF Capital

TRADERS BELIEVE THERE’S money to be made, somewhere, in any market environment. You’ve got to be where the action is. And because there are numerous times in which individual sectors trend while the broad market treads, sector allocation has become a hot concept among investors and money managers alike.

To suit the sector-allocation crowd, Wall Street has developed a number of sector-based exchange traded funds, known broadly as ETFs, which give you exposure to an entire sector or industry simply by buying a single share. Marketed as iShares, Sector SPDRs or StreetTracks, the products are essentially open-ended mutual funds that trade throughout the day, just like stocks. These sector-based ETFs have all sorts of interesting advantages over both individual stocks and mutual funds. But they also aren’t quite what they appear to be, and that can pose problems for investors who buy them thinking they’re getting something they aren’t.

First introduced in the early 1990s with the successful listing of the Standard & Poor’s Depositary Receipts (or SPDRs, pronounced “spiders”) on the American Stock Exchange, ETFs have become some of the hottest investing products on the Street. The American Stock Exchange, where most ETFs trade, has become virtually dedicated to supporting and developing these rapidly growing tools. There are well over 120 ETFs now trading, with more being introduced almost on a daily basis. (more…)