Did you know you can potentially benefit from being selective about the sectors you invest in? Now may be a good time to look into your portfolio’s sector allocation.
What is a sector?
A sector is a group of companies within an index that are similar businesses, grouped into similar economic drivers and, concurrently, risks. Typically, the companies in a given sector perform in a similar way during each period of the economic cycle.
Investing in a specific sector via an Exchange Traded Fund (ETF) is an efficient means of targeting particular economic or market trends, such as the growth of technology, or the urbanisation of the developing world. You may also want to consider a broad allocation across a range of sectors to improve portfolio diversification.
Benefits of Sector Investing
The key benefits offered by sector investing include:
Return Dispersion Investing in a particular sector is an efficient way of gaining exposure to certain economic themes, without the risk and administrative burden of picking a handful of names with specific exposures.
Risk Management A sector investment has lower concentration risk than an individual or handful of stocks, and can help to avoid the risk associated with single-stock investing (idiosyncratic or stock-specific risk). Correlations between sectors and the overall market are ‘not perfect’, which offers the potential to reduce overall risk in your portfolio.
Implementation Tools As sectors consist of companies engaged in comparable economic activities, there are often style characteristics in common. You can exploit these commonalities to implement an investment view, particularly as it relates to macroeconomic factors.
Considering both local and international real estate can offer access to varying market trends and economies. Real estate tends to do well during periods of improving economic growth.
This sector offers a source of income and the potential for capital appreciation, as well as typically acting as an inflation hedge.
Including real estate in a portfolio offers diversification benefits, typically leading to a reduction in portfolio volatility. This is because real estate’s correlation with stocks and bonds is ‘not perfect’, meaning they tend to perform differently through time. This smooths the return of the overall portfolio.
The Australian financial sector (excluding Real Estate Investment Trusts - REITs) currently accounts for a third of the Australian equity market. This sector allows you to express your view on Australia’s interest rate cycle, as the performance of financial institutions can be sensitive to interest rates due to the statutory capital reserve that these companies are required to maintain. Financials also enable you to express a view on the general health of the domestic economy.
Additionally, while past performance is not a reliable indicator of future performance, the sector has historically paid more to investors in the form of dividends than the market average.
Resource companies have played a significant role in the Australian economy for many years, and currently account for ~19% of total market capitalisation. An investment in this sector offers exposure to the underlying resources, such as oil and gas or metals and mining. In addition, it includes companies at the forefront of the transition to a Low Carbon Economy, such as Rio Tinto, which has divested itself of coal assets. Companies operating in this sector offer exposure to fast growing emerging economies like China and India, as resource companies fuel the growth and urbanisation of these markets.
Like real estate, the resources sector may provide you with an inflation hedge.
ETFs are attractive tools for implementing economic and broader market views, giving investors exposure to specific factors and styles. They can offer a cost-effective, liquid and transparent way to access sectors.
Some of our sector ETFs focusing on providing investors access to the real estate, financials and resources sectors are:
The SPDR® Dow Jones® Global Real Estate Fund (DJRE) offers exposure to more than 20 markets worldwide (including the US), across residential, industrial, office, retail, storage, hotels and health care properties.
The SPDR® S&P®/ASX 200 Financials EX A-REIT Fund (OZF) tracks the S&P/ASX 200 Financials EX A-REIT Index and has been launched with a particular view to investors seeking exposure to the Financials ex-REITS sector of the Australian equity market.
The SPDR® S&P®/ASX 200 Resources Fund (OZR) tracks the S&P/ ASX 200 Resources Index and offers investors exposure to the Resources sector of the Australian equity market.