The Sector ETF strategy we introduced last year has one thing that is difficult to understand in TradeStops. It’s the Asset Allocation tool.
The limitation is that every ETF is considered to be a “fund.” There is no official designation for ETFs like there is for individual stocks. For several decades, Standard & Poor’s has categorized each stock into a “Sector” and “Industry.” It’s easy to see that on TradeStops.
Here’s a Watch portfolio that consists of the top 10 holdings in XLF, the Select SPDR Financial Sector.
When we go to look at the Asset Allocation page of this portfolio, we see that it’s all just one sector (as we would expect).
There are, however, four industries that make up this portfolio.
But there is nothing similar for ETFs. There is no “Sector” or “Industry” classification. So for now, they’re all categorized as “Funds” and “ETFs.”
Here’s an example. If we look at the Sector ETF portfolio we set up last year, it all shows up as a single categorization. It’s listed as a “Fund” under the Sector analysis and an “ETF” under the Industry analysis.
So let’s find a way to get a better overview of the Asset Allocation of the Sector ETF portfolio. Long-time readers know that I like to have Watch portfolios that consist of the top 10 holdings for each Sector ETF. You saw the watch list for XLF above.
Here are all of the Sector ETFs that we follow with this strategy:
I’ve copied all of the positions from each ETF Watch portfolio into a new portfolio titled “All Sector ETFs.” This way we can look at the actual sector and industry allocation.
And here’s a look at that Sector Allocation. This is better than just one “Fund” sector.
And the same thing for the Industry Allocation. There are actually 35 different industries that are represented among these stocks.
This makes a lot more sense. And this is something you can do with many of the equity ETFs that are trading. Just create Watch portfolios for each ETF and add the holdings to the portfolio.
Setting up these types of Watch portfolios for ETFs is a good way to better understand your investments and make intelligent decisions based, at least partly, on your asset allocation goals.
Education Director, TradeStops