July 21, 2016
Investing in Sectors
There is a growing popularity among individuals to broaden their investment strategy beyond conventional allocations and investment styles. Some see sector investing as a way to seek new opportunities for enhanced portfolio performance.1,2
Sectors are made up of companies grouped by similar businesses that range from natural resources to financial services and from technology to consumer staples. In any given year, one sector may outperform another. For example, in 2015, consumer discretionary rose 8.4%, while energy fell -24%. 3
Successful sector investing depends on an individual’s ability to consistently and accurately determine when to rotate in and out of the various sectors, which may be a challenge for most investors.
Investors are further cautioned that some sector mutual funds are capitalization weighted, meaning that they can be very concentrated in a few stocks, so you need to do your homework.4
Sector Investing Strategies
There are a number of ways to implement sector investing, depending upon your objective.
Portfolio Carve-Out: This approach dedicates a portion of your portfolio to seek opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, potentially a Consumer Discretionary sector would be a consideration.
Risk Management: Because the correlations between different sectors can be lower than those between general categories (e.g., value vs. growth or large vs. small cap), investors may be able to build a portfolio of sectors that potentially may reduce overall investment risk.
Portfolio Completion: This strategy targets sectors that may be underrepresented in a current portfolio. For instance, if precious metals or real estate exposure is lacking, you can use sector investment to gain that exposure.
Successful sector investing may be a challenge for most investors, but it could present an opportunity for those who do their homework.