I personally prefer to trade the S&P 500’s index ETFs because I’m unable to consistently predict which stocks or sectors will outperform the broad index. But some traders and investors have the skill to do so. They’ll use earnings growth and technical indicators to predict which stocks/sectors will outperform. I think it’s a better idea to trade sector ETF’s instead of individual stocks if you think you have the ability to understand individual sectors and stocks.

What are sector ETFs

SPDR created 10 sector ETFs for the S&P 500.

These sector ETFs track the performance of individual stock sectors. That way traders and investors can focus on individual sectors instead of just trading an index ETF like SPY.

It’s important to know the components of each sector when you trade sector ETFs. For example, 21% of XLY (consumer discretionary) is Amazon, so changes in Amazon stock will have a big impact on XLY. 14% of XLK is Apple, so changes in Apple will have a big impact on XLK.

Why it’s easier to trade sector ETFs than individual stocks

The overall stock market index (S&P 500) is easiest to trade. You only have to know about the U.S. economy’s fundamentals, corporate earnings, and big technical indicators. You are either bullish or bearish on the S&P 500.

Individual sectors are harder to trade than the stock market index. Individual economic and political factors will determine which sectors outperform and which sectors underperform. For example, the financial sector tends to outperform when interest rates rise. The real estate sector tends to underperform when interest rates rise. You’ll have to predict interest rates when trading individual sectors. You don’t have to predict interest rates when trading the entire S&P 500’s ETF because you’re not looking for underperformance or outperformance.