With dispersion elevated throughout the pandemic, investors have gravitated toward sector exposures to express their market directional views. In Q2, sector ETFs listed in the US had their most inflows for a quarter since Q4 2016,1 featuring certain sectors posting their largest monthly flows ever (Health Care and Technology) in April. We know this because sector investing is in our heritage, and we continue to discuss the role sector strategies can play in the portfolio construction process.
Oddly, however, based on a competitor’s technology funds recently overtaking XLK , the Technology Select Sector SPDR Fund, in assets – an event that has occurred before – there are some rumblings regarding the suite’s prowess and prominent position.
Rumblings can turn into rumors, and rumors can turn into beliefs – regardless of what the data says. And my team performs a lot of data-driven due diligence on strategies. So as to quell the recent rumblings, the following is a data-driven due diligence on the Select Sector SPDR lineup and its market leadership position in cost, liquidity, and assets.
Costs are important. However, as we have discussed previously, expense ratios are just one piece of the total cost of ownership (TCO). Investors need to consider the bid-ask spread (i.e., trading costs) to really triangulate on the cost of utilizing a specific ETF to obtain an exposure.
The bid-ask spread for each Select Sector SPDR ETF has been a penny wide, on average. That means the suite’s average is a penny. And those spreads have stayed quite tight during periods of both tranquility and volatility. Meanwhile, the average bid-ask spread for the collection of the next 10 largest non-SPDR ETFs2 are much wider, and not a penny. What’s more, they may fluctuate randomly based on market conditions — specifically, during times of volatility, right when investors are likely seeking to reposition or meet client cash flow demands (i.e., when they need liquidity the most).
The chart below plots the averages throughout 2020 for these two “suites” to illustrate the SPDR Suite’s clear advantage from a trading cost perspective and, ultimately, from a total cost view as well.