NIZAM HAMID<br />HEAD OF SALES STRATEGY, ISHARES EUROPE<br /><br />SINCE the start of this year we have seen assets under management in sector exchange-traded funds (ETFs) overtake the open interest in the futures markets – the net value of all open positions. At the end of September 2009, the total value of assets under management in sector ETFs totalled €5.6bn compared to open interest of about €3.8bn in the futures market.<br /><br />This shift suggests investors are increasingly looking towards using ETFs to take a view on a sector because they find it easier to trade a sector ETF rather than a futures contract, where there is a much higher degree of risk.<br /><br />Unsurprisingly, banking and mining sector ETFs have proved particularly popular over the past six months. They have seen assets under management rise to €1.3bn and €600m respectively, as of the end of September. These are two areas of the market where people perceive the rally to have had the most impact and so have seen the biggest inflows. <br /><br />And those investors who are still looking to take advantage of the upside in the market will now be considering the high beta sectors, that is, sectors that tend to fluctuate much more than the overall market and so can produce higher returns. <br /><br />But after such a sharp rally, many investors are now less certain about the upside to the market and are starting to shift their money into some of the more defensive sectors. These include healthcare, food and beverages in order to manage their risk and protect themselves in case the rally reverses. <br /><br />Whatever their market view, ETF investors are looking for sectors that can drive their overall portfolio return. They can use ETFs to build up their portfolio and adjust the weighting of particular sectors to go overweight on those they think will do well in the coming months and underweight on those which are expected to underperform.