Portfolio Completion and Risk Management

Investors may wish to quickly gain portfolio exposure to specific sectors, styles, industries, or countries, but do not have expertise in those areas. Given the wide variety of sector, style, industry, and country categories available, ETF shares may be able to provide an investor easy exposure to a specific desired market segment.

An example would be the First Trust ISE Water Index Fund (AMEX: FWT). An investor might believe that water-related securities have the potential for profits because of the growing population in arid areas and the global shortage of clean water. FWT tracks the ISE Water Index, a cap-weighted index of currently the 36 largest companies that derive the bulk of their revenue from the potable water and wastewater industries.

Contrary to buying an ETF, an investor may already have significant risk in a particular sector but cannot diversify that risk because of restrictions or taxes. In that case, the person can short an industry sector ETF, or buy an ETF that shorts an industry for him (see Chapter 13).

For example, an investor may have a large number of restricted shares in the semiconductor industry. In that situation, the person may want to short shares of the SPDR S&P Semiconductor (XSD). That would reduce one's overall risk exposure to a downturn in that sector. XSD is an equal-weighted market cap index of semiconductor stocks listed on the NYSE, American Stock Exchange, NASDAQ National Market, and NASDAQ Small Cap exchanges.

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