Sector ETFs are a powerful tool for investors, offering a straightforward way to incorporate simple or sophisticated sector strategies with precision and transparency. And with $447B in AUM,1 it’s clear that equity sector ETFs are more than just a trend.
Powerful Portfolio Construction Tools
Sectors divide the economy into groups of companies that operate similar businesses or provide related products and services. Creating these segments enables in-depth analysis of market dynamics to see which parts of the economy are flourishing - or lagging - in order to find pockets of potential out performance.
Sector investments provide targeted exposure to these economic segments, giving you a wide variety of options to enhance the core of your equity portfolio and adapt to changing market cycles with agility and precision.
Using sector-based investment strategies can help you align and adjust your portfolios based on macroeconomic or thematic trends, like clean energy and declining interest rates, shifts in stock fundamentals, or technical indicators, like momentum.
Sector strategies can be employed to help you:
Pursue alpha: capitalize on a wide dispersion of returns by overweighting winners and underweighting losers
Position for business cycles: align your portfolio with shifts in business cycles by either increasing or reducing allocations to sectors based on the current economic phase
Capture secular or cyclical industry trends: sectors are closely aligned with specific economic variables (oil, inflation, rates), and can help investors capture secular or cyclical industry trends
Harness diversification benefits: seek targeted exposure to a theme or trend without taking on stock-specific risks
When you’re ready to implement a sector strategy, you can consider carving out a portion of your US equity exposure for sectors. Then, choose your sectors based on these types of analysis:
Analyze business cycles to rotate towards sectors that could potentially benefit more from the current economic phase.
Survey macroeconomic data (oil, inflation, rates) to position according to changes in certain macroeconomic variables. Identify cyclical or secular industry trends to harness the growth potential within a particular segment of the economy.
Use aggregated company-level data to identify sectors with attractive fundamental characteristics, such as cheaper valuations and/or stronger earnings sentiment.
Evaluate recent performance to overweight/underweight sectors with strong price momentum.
Choose ETFs for Your Sector Allocation
Investing in sector ETFs can be an efficient way to implement sophisticated strategies with precision and transparency.
ETFs can offer:
Exposure to an entire sector or industry in one trade;
Cost-effective, liquid access; and
Transparency, so you’ll always know the full makeup of your exposure.
Select Sector SPDR® ETFs
As the largest US sector ETF suite, Select Sector SPDR funds have historically traded with greater volume and tighter bid/ask spreads compared to other sector ETF families, which may lead to lower total cost of ownership.2
Let our Investment Solutions Group (ISG) do the work. The SPDR® SSGA US Sector Rotation ETF (XLSR), combines tactical overweights and underweights of S&P 500 sector ETFs based on ISG’s sector return forecasts and research, which includes a proprietary, quantitative sector selection model.