The Utility of Sector Investing
There is a growing popularity among individuals to broaden their investment strategy beyond conventional allocations and investment styles. Some see sector investing as a way to seek new opportunities for enhanced portfolio performance.1
Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing is also subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.
Sectors are made up of companies grouped by similar businesses that range from natural resources to financial services and from technology to consumer staples. In any given year, one sector may outperform another. For example, in 2021, energy rose 47.7%, while utilities only rose 14.1%.2
Successful sector investing depends on an individual's ability to consistently and accurately determine when to rotate in and out of the various sectors, which may be a challenge for most investors.
Investors are further cautioned that some sector mutual funds are capitalization weighted, meaning that they can be very concentrated in a few stocks, so you need to do your homework.3
Remember that mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
Sector Investing Strategies
There are a number of ways to implement sector investing, depending upon your objective.
Portfolio Carve-Out: This approach dedicates a portion of your portfolio to seeking opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, a Consumer Discretionary sector may be a consideration.
Risk Management: Because the correlations between different sectors can be lower than those between general categories (e.g., value vs. growth or large vs. small cap), investors may be able to build a portfolio of sectors that potentially may reduce overall investment risk.
Portfolio Completion: This strategy targets sectors that may be underrepresented in a current portfolio. For instance, if precious metals or real estate exposure is lacking, you can use sector investment to gain that exposure.
Successful sector investing may be a challenge for most investors, but it could present an opportunity for those who do their homework.
Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing also is subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.
1. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
2. VisualCapitalist.com, 2021
3. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.