Exchange-traded sector funds give investors the opportunity to instantly increase or decrease their exposure to different sectors of a benchmark through a one-step equity trade and offer diversification, low expense ratios, high tax efficiency, and at the same time allow investors the flexibility of the full range of stock order types throughout the day, Lipper reports. In addition, certain sector ETFs even have the added benefit of highly liquid options trading.

These characteristics have helped ETFs become one of the most flexible multi-purpose investment vehicles available. Today, there are approximately 195 ETFs listed, mostly on the AMEX, and their assets total over $260 billion.

In particular, investors are gravitating to the 40 sector ETFs available on the market, and a new report from Lipper focuses on three leading brands of sector ETFs: iShares, Select Sector SPDRs and Vanguard.

One of the biggest factors investors consider when choosing a sector ETF is whether it offers listed options. Today, 33 of the 40 sector ETFs offer this function, and when deciding which sector ETF with listed options to select, investors often look for market liquidity. Lipper found that liquidity seems strongly correlated with product maturity.

Select Sector SPDRs have recently had the greatest liquidity because of the 1.33 average quintile rank, while the newer Vanguard ETFs had an average of 4.64 on a scale of one to five.

"We believe first-to-market status is a highly important driver; although the Vanguard sector ETFs are still quite young and mostly small, it is possible they will gain options followings over time," the report said. "Our initial tendency is to doubt that until evidence proves otherwise."

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