Investors who look to target particular exposures or characteristics from their investments may stand to benefit from taking a more selective approach to investing, rather than investing in the broad market. One way to achieve targeted exposures may be through sector investing.
The Case for Sector Allocations
Investing in sectors allows investors access to underlying themes and trends in the markets. Investors are able to capture additional ‘beta’ alongside other choices, such as targeting countries or smart beta factor allocation.
The key benefits offered by sector investing include:
Risk Management: Sector investments offer lower concentration risk, lower volatility and reduce the ‘idiosyncratic risk’ (stock specific risk) associated with single-stock investing. Sectors and the broader market do not move in perfect unison (as they are not perfectly correlated), so investors can take advantage of this less than perfect correlation to potentially reduce risk in a portfolio.
Implementation Tools: Sectors consist of companies engaged in comparable economic activities, so there are often characteristics in common among securities within a sector. Investors can use these commonalities to implement an investment view, particularly as it relates to macroeconomic factors, without taking on the risk that comes with picking individual securities with that exposure. In addition, a single ETF with broad sector exposure is administratively much simpler to manage than a handful of securities which try to achieve the same objective.
Investing in one or two sectors is an efficient means of targeting particular economic or market trends, which can complement a broadly diversified portfolio.