Sector strategies may enhance the core of a portfolio by seeking alpha opportunities or potentially diversifying portfolio risks.
They can also be used to adjust a portfolio based on changing business cycles or cyclical trends.
Sector investing can be a powerful portfolio construction tool. Since economic variables and business cycles impact segments of the economy differently, sector-based investment strategies can help investors align and adjust portfolios to their objectives to accomplish four important goals:
Position for business cycles
Capture secular or cyclical industry trends
Harness diversification benefits
1. Pursue alpha
Sectors have historically exhibited wider dispersion than styles. In fact, the return dispersions among sectors have been wider than among styles every year for the past two decades, and more than twice as wide on average—even when we account for style-based strategies in the small-cap universe.1
A wide dispersion and changes atop the leader board provide opportunities to deliver alpha by overweighting winners and underweighting losers.