ETFs demystified: Should new investors go broad or bet on hot sectors?

I’m new to investing. Are ETFs a good starting point, and how should I choose between a broad-market ETF and a sectoral ETF? I’m looking for simplicity but also want to learn how markets work. Should beginners stick to broader exposure first, or is it okay to explore specific sectors if I’m interested in certain themes?

Advice by Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC

In today’s ever-evolving financial landscape, investors are constantly searching for tools that combine simplicity, efficiency, and adaptability. With countless investment options available, one category continues to gain prominence for its versatility and ease of use—Exchange Traded Funds (ETFs).

ETFs offer a smart, accessible entry point for those new to equities. Their appeal lies in simplicity, low costs, built-in diversification, and the ease of transacting on stock exchanges.

By investing in broad-market ETFs like those tracking the Nifty 50, Nifty 100, or BSE Sensex, investors gain instant market exposure. These funds mirror the market’s movements, helping investors get familiar with its fluctuations and behaviour.

But ETFs aren’t just a beginner’s tool. Their true strength lies in their versatility and adaptability. They can be integrated into any investment strategy—whether passive or tactical—depending on the investor’s goals, risk appetite, and market understanding.

For seasoned investors with well-diversified portfolios, ETFs can be used for tactical allocation. Tactical investing isn’t about speculation—it’s a data-driven strategy. By analysing macroeconomic indicators and market trends, investors can identify undervalued segments and allocate capital with the aim of exiting once the market corrects itself and the investment appreciates.

Thematic ETFs are commonly used for such tactical plays. For instance, if certain sectors are poised for growth, investors might consider sector-specific ETFs like the Nifty FMCG, Nifty IT, Nifty Auto, Nifty Infrastructure, or Nifty Oil & Gas ETFs.

This can get even more granular. For example, someone bullish on the banking sector may choose the broader Nifty Bank ETF. However, if the view is more selective, they might focus on private banking via the Nifty Private Bank ETF, which includes 10 private sector banks. Others might prefer to target public sector lenders with the Nifty PSU Bank ETF.

The core idea is that not all sectors perform in unison. As the economy progresses through different phases of the cycle, sectoral leadership changes. Timely entry and exit in sectors with strong potential can significantly enhance portfolio returns. That said, such tactical strategies are more suitable for experienced investors.

Market-cap-based tactical investing is also an option. Investors seeking midcap exposure might look at products like the BSE Midcap Select ETF or the Nifty Midcap 150 ETF.

For investors looking to park idle cash efficiently while maintaining liquidity, Liquid ETFs offer an ideal solution—providing passive returns with the flexibility to quickly deploy funds when market opportunities arise.

Tactical allocation doesn’t always have to be short-term. It may reflect a long-term conviction in a specific sector. For example, a long-term bullish view on healthcare could lead to consistent investment in a Nifty Healthcare ETF.

ETFs also support diversification beyond equities. Investors looking to hedge or gain exposure to commodities can turn to options like Gold ETFs, Silver ETFs, or even sector-specific products like the Nifty Metal ETF.

Another powerful category is Smart Beta ETFs. These aren’t based on traditional market-cap weightings but instead use factors such as value, low volatility, quality, or momentum to build the

index. Smart Beta strategies can help balance an existing portfolio by adding a different investment style or factor exposure.

In essence, ETFs are a multifaceted investment vehicle. Whether you’re just starting out or are an advanced investor fine-tuning your strategy in response to economic shifts, there’s an ETF that fits. They are not only about passive investing—they’re about precision, choice, and adaptability in a dynamic market environment.