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After a quarter in which the high dispersion of performance between sectors continued to provide opportunity for relative gains, economies has begun to recover and economic data globally is bouncing back. However, there are still risks, with no near-term COVID-19 vaccine and possible continued lockdowns following new spikes and recovery optimism may not pay off. There could be more equity rallies, but they could also prove short-lived as with the recent rotation from growth to value. And the run-up to the US election is also likely to impact sector performance.
So what does this mean for sector investors over the coming months? Join Rebecca Chesworth, Senior SPDR Equity ETF Strategist at State Street Global Advisors and Marija Veitmane, Senior Multi-Asset Strategist at State Street Global Markets to hear where institutional and ETF investors have been placing their sector bets, and what opportunities we expect to see over the next quarter.
Sectors allow targeted exposure to capture opportunities in market (be it sentiment, macro factors, themes, style). Across a fund range there is also the ability to play different parts of the business cycle in different regions, e.g. US vs. Europe.
Dispersion between sector returns
Dispersion of returns is a defining characteristic of sector investing. As different sectors have different drivers, their returns will diverge over a given period. According to S&P, the dispersion between sector returns accounts for roughly half of the dispersion between stock returns. This implies that half of the value added from picking stocks could be achieved with selecting the right sectors.
Diversification of risk1 Sector investment offers a lower concentration risk than individual stocks and helps avoid idiosyncratic risk associated with individual stocks.
Varied correlations between sectors Each sector has a different correlation with the overall market. Taking advantage of these differences could reduce risk in a portfolio.
Because sectors comprise companies with the same economic activities, there are often style characteristics in common. This knowledge can be utilised to implement an investment view, particularly related to macroeconomic factors.
Implementing Sector Investing
Harnessing the Power of Sector Investing Through ETFs
Investing in sectors can align portfolios with broader market trends, giving exposure to specific factors and styles.
Sectors are particularly well suited to target certain economic variables and, when accessed through ETFs, investors can implement macroeconomic views simply and cost-effectively.2
Sectors offer a selective exposure with opportunities to potentially benefit from significant return dispersion
Investing in sectors can provide a better means of capturing thematic trends than individual stocks
ETFs are attractive tools for implementing economic and broader market views
1 Diversification does not ensure a profit or guarantee against loss. 2 Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. 3 Source: State Street Global Advisors, as at 31 December 2019.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies. SPDR ETFs may not be available or suitable for you.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective.
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Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
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