New sector trackers offer alternative to stock-picking

Investors seeking to profit from future rallies, or falls, in individual stock market sectors can now buy into a new range of exchange-traded funds (ETFs) listed on the Deutsche Börse.

Source, the specialist provider of listed funds, has launched 18 ETFs tracking the recently created Dow Jones STOXX 600 Optimised Supersector indices.

These indices have been created by Source and Stoxx to allow European investors to open both long and short positions in all major sectors, by taking into account an investors’ ability to borrow stock in the stock-lending market. Source has also worked with its four counterparty partners – Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley and Nomura – to provide enhanced liquidity for investors looking to trade sector ETFs with narrow bid-offer spreads.

“Investors are sold on liquidity and transparency,” said Source marketing director Michael John Lytle. “So we have concentrated on liquidity. We invited other banks to join our platform – we came out with three banks, and have now added Nomura – and put the exposure into one vehicle on one exchange.”

In recent weeks, the UK equity market rally has been led by banks, resources, telecoms and media stocks – all of which can be tracked by individual Supersector ETFs. However, the Source ETFs give exposure to individual sectors containing companies from 15 European countries in addition to the UK.

Advisers believe they can offer diversification benefits to investors who have the time to make broader sector allocation decisions, but not to pick individual shares.

“It is perhaps a way of drilling down from an index, like the FTSE 100, into commodities, oil, or pharmaceuticals,” said Adrian Lowcock, senior investment adviser at Bestinvest. “If you can access an asset class without having to pick a company, it can be beneficial for some investors, but not all – you still have to do your homework.”

However, Andrew Wilson, head of investment at Towry Law, argued that private investors and independent financial advisers would prefer to use actively managed funds – rather than index trackers – to gain exposure to certain sectors. “If a private client took the view that he wanted exposure to banks but did not have the time or inclination to decide between RBS or Lloyds, the path of least resistance would be to buy a sector ETF. But we’d prefer to take a risk on a fund manager, who can take a macro or micro view about being overweight or underweight in a particular bank.”

He believes that sector ETFs will be of most use to fund managers themselves. “Fund managers might well take advantage of these things – in particular, they would appeal to hedge fund managers and managers of Ucits III funds, who could use them against a long position or short position.”

Source’s 18 Supersector ETFs take its product range up to 54 funds, across equity and commodity markets, holding $774m-worth of assets.