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Many investors have used sector ETFs for positioning during the COVID-19 crisis. As investment vehicles, sector investments via ETFs provide diversification and help to mitigate the risk associated with investing in just one company. Sectors also provide the ability to target more defensive parts of the economy that could benefit most from recovery or that have been overly marked down given long-term prospects.
Many investors have recognised the potential benefits of sector selection and may have profited from the much higher dispersion of sector returns over recent months, as seen in the chart below. During this period, flows into sector ETFs reached near-record levels. The highest inflows have consistently been into Technology and Health Care, which have shown strong earnings sentiment. Financials has been unpopular as various QE measures are likely to hit margins for an extended period of time and there has been heavy two-way trading in Energy.
Return dispersion has dampened but there is still a significant difference between sector returns year to date: MSCI World Information Technology NTR has returned 5% while Energy is down 34%.