Sector ETF Trading Takes Off

Chidem Kurdas

The exchange-traded fund most used by hedge funds and other traders tracks a broad-based benchmark, the SPDR S&P Trust with daily average turnover of more than $19 billion. But traders are increasingly employing single sector, country and specialized ETFs.

This trend started years ago but is now more pronounced. Financial Select Sector SPDR and Energy Select Sector SPDR are among the ten largest ETFs by turnover, according to data from  NYSE Euronext. So is iShares MSCI Brazil index fund. Emerging markets ETFs have become a favorite way to get that exposure.

More and more hedge funds are using ETFs because these are a low-cost, efficient way to get exposure, says Martin Kremenstein, a director of Deutsche Bank’s DBX North America business who oversees $14 billion in ETF assets. He was speaking at a Capital Link Forum.

A few big ETFs remain trader favorites, such as the iShares Russell 2000 Index Fund and  also the SPDR Gold Trust, used by John Paulson, for instance.

As an ever-expanding variety of ETFs become available, it is possible to execute a wide range of trades with the vehicles. The top-ten turnover list even includes a volatility play, iPath S&P 500 VIX Short-Term Futures exchange-traded note.

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