Bull vs. Bear is a weekly feature where the VettaFi writers’ room takes opposite sides to debate controversial stocks, strategies, or market ideas — with plenty of discussion of ETF ideas to play either angle. For this edition of Bull vs. Bear, Nick Wodeshick and Elle Caruso debate the case for using sector ETFs to make bets on the new market regime.
Nick Wodeshick: Hello, Elle! Since the new year has just begun, it’s an opportune moment to take a look at whether sector ETFs may be the right play for now. Given what happened last year and market anticipations for 2025, I believe sticking with specific sectors is still a good bet.
Elle Caruso: Hey, Nick. What a great time to talk about sector ETFs. I’m a bear; I believe investors are likely unable to beat the market by overweighting certain sectors.
Uncertainty has been a key theme in markets for the past few years, and will remain a theme throughout 2025, as the U.S. adjusts to a new administration. During periods of uncertainty, I believe investors are best positioned maintaining a well-diversified portfolio and avoiding any big bets. This includes making bets on particular sector ETFs.
History has shown that long-term investors could potentially enhance returns and reduce risk by maintaining a well-diversified portfolio. Instead of making bets on individual sectors, investors may want to consider the ALPS Equal Sector Weight ETF (EQL).
EQL provides equal exposure to each sector and, therefore, should be able to avoid the potentially adverse impact of rallies or crashes in specific sectors of the economy. EQL is interesting, as it utilizes a fund-of-funds ETF structure, investing equal proportions in 11 Select Sector SPDRs. The fund, which rebalances quarterly, delivers moderate yet meaningful exposure to every sector of the market, effectively removing sector biases.
Sector Rallies Offer Dynamic Opportunities
Wodeshick: I’d certainly agree that broad sector exposure can offer some distinct benefits. However, not maintaining a strong presence in specific sectors can cause investors to miss out on historic rallies.
For example, take a closer look at the tech sector, especially with regard to the Magnificent Seven stocks found there (Apple, NVDIA, and Microsoft). Each of these companies saw some degree of successful results in 2024. CNBC even notes that the Magnificent Seven drove more than half of the S&P 500’s growth last year.
Many of these companies have seen robust growth through their involvement in the growing field of artificial intelligence. This includes companies like Apple and Microsoft, constantly competing to remain at the forefront of the AI race. Moreover, Apple and Microsoft possess diversified means to deliver quarterly revenue for their shareholders.
And you certainly can’t discuss AI or S&P 500 growth without mentioning NVIDIA, either. The chipmaking giant has continued to grow in size and revenue with each subsequent quarter.

The artificial intelligence theme won’t be going away anytime soon, either. Companies around the world are seeking to bolster their AI capabilities. Data centers continue to be built as demand grows for this burgeoning market. As such, NVIDIA’s deluxe chipmaking expertise could continue to remain in demand in the near future.
Staying engaged with tech giants doesn’t need to solely be an AI play, either. Amazon remains one of the most relied-upon online marketplaces in the country. Meanwhile, Apple continues to deliver with iPhone sales and other electronic services.
As such, it’s hard to imagine a future in which at least some of the Magnificent Seven’s members are unable to continue to rally in 2025. By taking an equal weight or more diversified approach, traders can easily miss out on some of the companies with the most potential in both the near- and long-term.
Timing the Market Is a Challenge for Even the Most Experienced Investors
Caruso: Choosing which sectors to overweight or underweight is a challenge. But choosing when to add or decrease exposure to particular sectors may be even more difficult.
It is extremely challenging for even investment professionals to correctly predict in which direction, and when, a security will move. But that’s exactly what you have to do when making bets with sector ETFs. Investors need to choose which sectors will be winners and which will be losers, and they need to be correct, or else they will trail the broader market.
For this reason, many investors will be better off maintaining a consistent allocation to a broad U.S. equity ETF, as opposed to moving in and out of sectors as a way to try to beat the market. While the SPDR S&P 500 ETF Trust (SPY), the Vanguard S&P 500 ETF (VOO), and the iShares Core S&P 500 ETF (IVV) do not have equal exposure across sectors, they offer a snapshot of the overall U.S. market and deliver sector exposure accordingly.
Sector Exposure: Know What You Own
Wodeshick: You’re right, Elle. Many of the most highly utilized large-cap ETFs don’t provide nearly as much sector diversification as an investor might assume. For instance, take a closer look at the SPDR S&P 500 ETF Trust (SPY).
It’s no understatement that SPY has often served as a reliable benchmark for accessing returns from the S&P 500. However, SPY’s sector and company exposure is not nearly as diversified as an investor may assume.
As of January 10, 2025, over 30% of SPY’s portfolio is cemented within the information technology sector. This tech exposure alone constitutes more than the combined weight of the materials, real estate, utilities, energy, consumer staples, and industrial sectors.
This isn’t necessarily due to the amount of tech companies within the S&P 500, either. Much of this sector exposure actually has to do with the individual companies that SPY invests in.
Since SPY is cap-weighted, the fund naturally holds stronger positions in top stocks like Apple, NVIDIA, and Microsoft. As such, the top stocks within the fund can carry far more weight than individual investors may expect.
That being said, SPY has seen exceptionally good results in the last year. As of December 31, 2024, the fund’s NAV has jumped more than 24% over the last 12 months. Given its portfolio structure, some of this success could be attributed to the fund’s stronger focus on technology.
Other, more directly sector-focused ETF strategies are seeing good results as well. Looking beyond technology, another sector that performed well last year was consumer discretionary. Intrinsically, investors may wish to then build up their consumer discretionary exposure with a targeted ETF.
One means to do so also rests in State Street’s ETF library. This fund in question is the Consumer Discretionary Select Sector SPDR Fund (XLY). For its investors, XLY offers low-cost access to a growth-oriented portfolio of consumer discretionary stocks. For example, one of the fund’s top holdings is Amazon.
Much like SPY, XLY has also enjoyed strong results over the past 12 months. As of December 31, 2024, the fund’s NAV has skyrocketed 26.45% over the last year.
All in all, these State Street funds highlight the distinct benefits that investors can access through amplifying sector exposure. Whether it’s a thematic fund like XLY or a tactical sector tilt like SPY, traders can use ETFs to tap into these specific sector rallies.
Investors Should Take a Holistic Approach to Portfolio Construction
Caruso: That’s an interesting point, Nick. However, my final concern with overweighting sector ETFs is that investors will likely be using sector ETFs alongside broad U.S. equity ETFs, like SPY, VOO, or IVV.
By and large, U.S. portfolios lean heavily toward domestic large-cap growth stocks. Furthermore, U.S. investors are currently facing concentration risk near an all-time high. Many portfolios are already overweight the megacap names that will also be the top holdings in many sector ETFs.
Therefore, I oppose the idea of increasing a portfolio’s concentration risk further with duplicate exposure to certain sectors by allocating to sector ETFs.
While sector ETFs can be used as a tactical play, it’s imperative for investors to first consider their total exposure to a security with a thorough understanding of the other funds in their portfolios.
Instead, investors may choose to add exposure to a particular theme instead of an entire sector. For example, if an investor wants to capitalize on innovation in cybersecurity, rather than overweighting the information technology sector via the Technology Select Sector SPDR Fund (XLK), perhaps they might want to consider the Amplify Cybersecurity ETF (HACK) or the Global X Cybersecurity ETF (BUG).
100% of XLK’s holdings — amounting to 68 securities — are also in SPY. However, just 10 names in HACK and four names in BUG overlap with SPY's portfolio. Therefore, investing in thematic ETFs may be a solution for investors looking to place bets on a certain innovation or trade without necessarily duplicating existing exposure or adding significant concentration risk.
Cap Weight Strategies Could Perform Better
Wodeshick: I get what you mean here, Elle. That being said, many investors who are trying to broaden out their sector exposure do so through equal weight strategies. Sure, these equal-weight ETFs and mutual funds can cover a lot of bases at once. However, choosing these strategies can accrue more consequences than one would traditionally expect.
Recently, S&P Dow Jones Indices released a report highlighting how equal-weight and cap-weight strategies performed last year. In the report, one can see that the S&P 500 Equal Weight Index distinctly underperformed its cap-weight counterpart by 12% in 2024.
This is due in part because seven of the 11 equal-weight sectors were bested by cap-weighted counterparts. These discrepancies become especially clear when you look at sectors such as communication services, technology, consumer discretionary, and consumer staples. These four sectors, in particular, significantly outperformed that of their equal-weight contemporaries.
Sure, this means that four of the equal-weight sectors managed to outperform their cap-weighted alternative. However, these differences were not nearly stark enough to justify the underperformance that the other seven sectors accrued.
The disappointing results of the S&P 500 Equal Weight Index isn’t even a notable anomaly, either. 2023’s results saw the equal-weight index underperforming by an even larger margin.
Looking broadly, direct sector exposure can position one’s portfolio to deliver stronger returns than that of a broad index. By avoiding weaker sectors like healthcare or materials, traders can tap into the dynamic momentum that propels some of the strongest cap-weight sectors out there.
Looking ahead, some experts expect broadening market growth to be a boon to equal-weight strategies. However, many of these same potential growth drivers also apply to the sectors that are still leading the market. As such, investors shouldn’t necessarily expect these sectors to start underperforming any time soon.
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