Investment Ideas

Sector Investing

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.

Investing in the Property Sector

Considering both local and international real estate can offer investors access to varying market trends and economies. Real estate tends to do well during periods of improving economic growth. The sector can play a meaningful role in an investor’s portfolio, offering the following benefits:

  • Real estate offers the potential of capital appreciation and a stable source of income.
  • As developed economies start to show signs of inflation again, real estate may act as an inflation hedge.
  • The sector offers investors the potential for portfolio level diversification and therefore a reduction in portfolio level volatility as real estate is not ‘perfectly correlated’ with stocks and bonds.

Investing in the Financials Sector

The Australian financial sector (excluding Real Estate Investment Trusts-REITs) is the largest domestic sector by market capitalisation, currently accounting for around a third of the Australian equity market. An allocation to this sector offers investors:

  • An attractive exposure for investors seeking to express a view on the interest rate cycle. The performance of financial institutions can be sensitive to interest rates due to the statutory capital reserve that these companies are required to maintain. Over the last ten years, the sector performed in line with the market when interest rates were relatively stable. Its relative performance tended to move in an opposite direction to interest rates; outperforming the market when interest rates have trended downward and vice versa.1
  • Financials enables investors to express a view on the general health of the domestic economy, as the sector is dominated by banks and financial institutions that tend to respond promptly to business confidence and household income and balance sheets.
  • Historically, the sector has paid more to investors in the form of dividends than the market average. This is not surprising given that the majority of companies in the sector are large and established companies with relatively stable cash flows.2

Investing in the Resources Sector

Resource companies have played a significant role in the Australian economy for many years, and currently account for more than 19% of total market capitalisation.3 Australian resource companies are some of the most successful resource companies in the world. Exposure to this sector can offer investors:

  • Diversified exposure to the underlying resources, such as oil and gas or metals and mining, as well as exposure to companies at the forefront of the transition to a Low Carbon Economy, such as Rio Tinto, which has divested from all coal assets.
  • The sector is a natural choice for investors who want indirect exposure to fast growing emerging economies like China and India. Resource companies provide key ingredients to fuel the growth of emerging markets and they can provide a proxy to the growth of these markets. 
  • The nature of energy and mineral resources may be attractive for investors seeking inflation protection. Energy and raw materials are often cited as a source of inflation.

Using ETFs to Implement Sector Investing

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.

We believe flexibility and choice are important. This is why we have designed a broad range of ETFs, covering Australia, Europe, US and global 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. 

Themes to Consider

Sector investing strategies can help investors target their exposure and position their portfolios to take advantage of market events, macro trends or shifts in fundamentals. So what big themes should investors consider today, which may impact sector selection?


Creating a Tax Efficient Portfolio with ETFs

Among their many advantages —intraday liquidity, transparency and ease of use —ETFs are highly touted for their tax efficiency and low cost. Their unique structure gives tax-aware investors the opportunity to minimise capital gains distributions and allow formore assets to remain invested, thus increasing the growth potential of the investment.

Source: Factset as of 30 June 2019
2 Source: Bloomberg, during period of June 2009 to June 2019
3 Resources accounts for 18.85% of the S&P/ASX 200 Index. State Street Global Advisors, S&P/ASX, FactSet, as at 30 June 2019