You might wonder why a penny stock trader would look at sector ETFs.
After all, you won’t likely find penny stocks in those ETFs.
Well for me it’s two fold…
- Finding stocks to trade
- Conviction in a trade
You know the saying… A rising tide lifts all boats. Think about it.
If there’s a sector that’s on fire, large caps aren’t the only ones getting attention.
Penny stocks will have plenty of interest as well.
So not only is this another way to find stocks I may not have noticed…
It’s also a way that I can add a little conviction to my trading.
Here’s how I use it…
What’s a Sector ETF anyway?
First off, an exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. The basket can be any type of security…bonds, commodities, currencies, stocks, you name it.
We all know the SPY, DIA, and QQQ…well those are ETFs.
They each track a broad market average…The S&P 500 (SPY), Dow (DIA), and Nasdaq (QQQ).
A sector ETF however, tracks a basket of stocks representative of a specific sector rather than the broad market.
Below is a list of some of the sector ETFs that cover the 11 major sectors out there.
These specific ETFs are all Standard & Poor’s Depositary Receipt, or SPDR exchange traded funds which are issued by State Street Global Advisors.
XLE – energy
XLF – financial
XLK – technology
XLRE – real estate
XLU – utilities
XLB – materials
XLI – industrial
XLY – consumer discretionary
XLP – consumer staples
XLV – health care
XLC – communication services
By no means are we limited to these 11 ETFs. There are a number of ETFs that represent the same sectors as above, as well as ETFs that get more specific.
If you like to trade biotechs for example, the XLV health care ETF might be too broad, so you may want to keep your eye on the IBB (iShares Nasdaq Biotechnology ETF).
And the energy ETF, XLE, will give you a view of energy as a whole, but what if you are looking at a renewable energy stock?
There are ETFs for that…CNRG is a renewable energy ETF, while TAN gets even more focused as a solar ETF and FAN represents another specific renewable energy, wind power.
These are all examples of energy, but each one a more specific area, so depending on your personal focus…there’s an ETF for that.
How I use Sector ETFs
I like to start my day by looking at the different sectors.
This gives me a view of what stocks are performing well at the moment, and where I may want to focus some attention.
If I start my morning with a quick look at the sector ETFs and see that XLE is up…I will spend a little time eyeing energy related stocks to see if I spot anything.
I will also simply keep this in mind as I’m looking at my scanners, it’s just another piece of information as I’m looking for trades.
The other way I use the sector ETFs is to add conviction to a stock I’m watching or looking to trade.
Comparing an individual stock to its sector as a whole let’s me see how it’s performing compared to its peer group.
So if I’m eyeing a trade and the specific sector isn’t looking strong, this may warrant a little investigation. Maybe I don’t take the trade, or maybe I decide to just lower my target on the trade.
However, if the sector is strong as a whole, this might give me a little extra conviction on the trade.
ETFs give investors a way to invest in an entire sector or industry without having to piece together the individual stocks on their own.
But for my purposes…I’m using them to check the health and performance of the overall sector I may be looking to take a trade in…and as a way to know what’s hot so I can have my eye out for stocks in those sectors.
I want to fish in the pond with a lot of fish… Maybe they bite, Maybe they don’t…but if the sector is moving as a whole, it ups my odds.