Why do some investors purchase a basket of sector funds (that replicate a broad market index) instead of a broad market index fund?
For example, instead of purchasing the S&P Depository Receipts (SPY), an investor may purchase the nine Select Sector SPDRs. Although this may seem imprudent at first, the investor now has the ability to realize losses in specific sectors, whereas a broad market index does not have this ability. For example, in 1999, while the S&P 500 was up 19.1%, several constituent sectors were down. An investor that holds the underlying sector funds individually would be able to sell the poorly performing sectors to offset gains in the remainder of his portfolio. Please note that the sector used for the nine Select Sector SPDRs are determined by the Merrill Lynch Research Department, not Standard & Poor’s.
