By Ron DeLegge, Editor

SAN DIEGO (ETFguide.com) - There are many favorite sayings for avid sector investors. “Individual stocks come and go, but industry sectors never die,” is one such expression.

The basic idea of sector investing is to focus on major economic investment themes and the specific sectors that stand to benefit the most. A sector strategy reduces the need for researching individual securities and also eliminates the risk of single stocks by taking a more diversified approach.

There are more than 200 sector ETFs making it one of the largest ETF categories. Let’s analyze some of this year’s top performing industry sectors.

--Commodity Stocks
Even though it’s the tiniest S&P 500 industry sector, materials (NYSEArca: XLB) are so far the top performing S&P sector. XLB has climbed around 34%, besting the broader S&P 500 (NYSEArca: SPY) by 20%. Materials stocks are closely connected to commodities. They cover industries like chemical makers, construction materials, containers and packaging, metals and mining, along with paper and forest products.

Other ETFs that invest in commodity stocks, but with a global approach are the Market Vectors-RVE Hard Assets Producers ETF (NYSEArca: HAP). The fund follows the Rogers Van Eck Hard Assets Producers Index, which consists of companies engaged in the agriculture, energy, metals and mining, forest products, and water. The Hard Assets Producers Index is a modified capitalization weighted, float adjusted index. The index is rebalanced quarterly and reconstituted annually. HAP charges 0.65%.

--Technology Re-Emerges
Technology stocks (NYSEArca: XLK) have risen 31.3% year-to-date* and are the second best performing industry sector within the S&P 500. The technology industry accounts for 21.74% of the S&P 500’s overall sector weighting, making it the largest sector within the index. With almost $4 billion in assets, XLK is the largest technology ETF. There are almost 80 technology stocks inside XLK covering key segments like networkers, semiconductors and software makers.

In 2008, XLK declined by 41.39% compared to a 38.49% fall in the S&P 500. Microsoft (9.69%), IBM (7.89%) and Apple (7.87%) represent the fund’s three largest holdings in order. XLK’s annual expense ratio is currently 0.21%.

If you want more diverse exposure to technology stocks, the Vanguard Information Technology ETF (NYSEArca: VGT) follows around 400 tech stocks within the MSCI US Investable Market Information Technology Index. The fund has $599 million in assets and this particular technology ETF is the most diversified among similar offerings. The median market size of technology stocks in the fund is $71.6 billion and VGT’s annual expense ratio is 0.25%.

--Financials Rebound
After a horrific 2008, financial stocks are on the mend. The Financial Select Sector SPDR (NYSEArca: XLF) which follows S&P financial stocks has risen 14.1% so far this year. XLF includes financial stocks from key sub-sectors like banking, insurance and investment brokerage. The yield for XLF is 3.49%.

To the surprise of many, stocks within the problem plagued banking sector (NYSEArca: KBE) have gained 3.41% on the year and more than 20% over the past three months. The general interpretation by some analysts is the worst of the recession and credit crisis is behind banks. Other analysts point to the deflated commercial real estate market as the next shoe to drop. Banks still face billions maybe trillions of dollars more in write-downs from the sagging commercial mortgage backed securities (CMBS) market.

--Hedging Your Sector Bets
What if you aren’t too keen about investing in risky individual sectors? Instead of putting your money into narrow sector ETFs, the equal weight approach might be just the ticket. For example, the ALPS Equal Sector Weight ETF (NYSEArca: EQL) owns each of the nine Select Sector SPDR ETFs in equal portions of 11.1%. This type of strategy prevents any one sector from dominating over the others.The nine Select Sector SPDR ETFs are rebalanced back to equal weight on a quarterly basis. EQL’s annual expense ratio is 0.55%.

Most equal-weight indexes are based at the stock level,” states ALPS Director of Product Research, Jeremy Held. “EQL is an important extension of the equal-weight concept in that it addresses sector risk, which we consider to be a much more important and fundamental risk to client portfolios than individual stocks.”

--Conclusion
It remains to be seen if today’s top performing sectors will continue their leadership role. How will they react if the stock market begins to fall apart? Will they continue to lead or falter? No matter what happens sector investing, if done right, can be a profitable endeavor in any kind of market.

*Performance figures, unless otherwise stated, are YTD through September 8th market close.