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Opinion: These ‘lucky seven’ ETFs have left the S&P 500 in the dust

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Late last year, I did a deep dive into how sector funds had done, and I stumbled upon the astonishing outperformance of four sector ETFs that rose at least five-fold from the start of 2007, when several were opened.

Three other sector and niche funds I track returned more than six times investors’ money over those 14 years. So, altogether, the seven exchange traded funds beat the SPDR S&P 500 ETF
SPY,
+0.27%
by at least 160 percentage points. (SPY tracks the benchmark S&P 500 Index
SPX,
+0.23%.
)

Not surprisingly, technology ETFs were standouts, alongside a biotechnology ETF and one that focuses on the largest initial public offerings (IPOs). An equally weighted health-care ETF and a consumer cyclical sector fund round out the list.

If you had invested $20,000 in any of them in 2007, you would have made more than $100,000 by the end of last year, and sometimes much more.

But before I name the big winners, here’s a huge disclaimer: These ETFs have flourished while technology has ruled. And given the market’s wildly high valuations, I wouldn’t buy these ETFs aggressively now but would wait for a market correction to add to my positions or establish new ones.

Also, the market may find new leadership in the years to come, and today’s sensational outperformers may be tomorrow’s laggards and duds.

So, here are our “lucky
seven” winners:

The best performer over the period was the Invesco QQQ Trust
QQQ,
+0.91%,
which owns the stocks in the Nasdaq 100. With over $150 billion in assets, it’s the fifth-largest ETF and the biggest that doesn’t cover the S&P 500.

Had you bought QQQ on Jan. 3, 2007, you would have made more than eight times your money: A $20,000 investment then would have been worth about $164,000 at the Dec. 31, 2020, close, a 720% gain. Wow. The modest 0.2% expense ratio makes it cost-effective, too, and its beta (variability with the market) isn’t much higher than the S&P’s 1. Its 10-year standard deviation (the variability from its average return) is also a pretty modest 15.6%.

But at least 40% of QQQ’s assets are in Apple
AAPL,
+3.53%,
Microsoft
MSFT,
+0.71%,
Amazon
AMZN,
+1.84%,
Tesla
TSLA,
-0.57%,
Facebook
FB,
+1.98%
and Alphabet
GOOG,
+0.87%

GOOGL,
+0.86%,
parent of Google. Those companies are likely to remain dominant, but will their stocks keep up their torrid pace? Who knows?

The Technology Select Sector SPDR ETF
XLK,
+1.28%
comes next, with almost a 600% gain — nearly seven times your money — over those 14 years. It’s a tech pure play, but because of the way indexers have rejiggered their categories, its top 10 includes Visa
V,
-0.11%,
Mastercard
MA,
+0.17%
and Nvidia
NVDA,
+2.56%,
but not Tesla, Amazon, Facebook or Alphabet. Its below-market beta and reasonable 10-year standard deviation of 15.5% shows it’s less volatile than you’d think, and its expense ratio of 0.13% is downright cheap.

The Invesco S&P 500 Equal Weight Technology ETF
RYT,
+0.19%
owns about the same number of stocks (76) as XLK and has roughly the same median market cap ($100 billion plus), but its holdings are spread out evenly. Its 475% total return over 14 years is nothing to sneeze at, but its slightly higher (0.4%) expense ratio and 10-year beta of 1.12 and standard deviation of 17.5%, plus QQQ’s and XLK’s spectacular outperformance, make this a bit less attractive.

Invesco S&P 500 Equal Weight Health Care ETF
RYH,
-0.45%
and iShares Nasdaq Biotechnology ETF
IBB,
-0.69%
also shone. These health-care ETFs have below-market 10-year betas, though IBB’s standard deviation of 21.4% is the highest in this group, and expense ratios for both are in the 0.4% range. The Consumer Discretionary Select SPDR ETF
XLY,
+0.75%
might appear to be a way to diversify from tech or health care, but Amazon and Tesla comprise nearly 40% of its holdings, so this doesn’t add much value over QQQ.

Finally, the First Trust US Equity Opportunities ETF
FPX,
+0.54%
owns IPOs from both glitzy tech and social media start-ups and spin-offs from established companies. Over the 14 years, you would have made six times your money or almost exactly 500%. Its beta is slightly higher than the market’s and its 10-year standard deviation is a decent 17%. Its largest holdings include Snap
SNAP,
+4.15%
and Uber Technologies
UBER,
-0.19%,
as well as old-school Dow
DOW,
-1.20%
and Eli Lilly
LLY,
+0.87%,
both of which announced spin-offs. FPX’s expense ratio is the highest for this group, but a still modest 0.58%.

If I had to choose, I’d buy QQQ, RYH, IBB and FPX, but I’d make them a small part (no more than 10%) of a broadly diversified stock portfolio, particularly in a retirement account or Roth IRA. At these levels, I’d either average into them a little at a time or wait for a correction to establish positions.

Howard Gold is a
MarketWatch columnist. Follow him on Twitter @howardrgold1. He and his wife own
small positions in all of these ETFs except for XLY in their retirement
accounts.

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