Featured as part of our focus on celebrating International Women’s Day today, Rebecca Chesworth, Senior Equities Strategist at State Street SPDR ETF, analyses why and how sector investing is gaining traction
As we all know, equity investors can choose between many active or index (often called passive) options, but few consider that within the latter category they can be very active. When looking at a simple top-down allocation, equity investors will primarily decide on selection by country, style factor or sector. It is the sector/industry choice which has really captured the imagination recently, reignited in response to the first announcements of successful COVID-19 vaccines last November.
Investing by sector allows very quick rotation from one part of the economy to another, investing in a group of companies that have traditionally shown a similar response to economic factors such as interest rates or inflation. An example of this is the heavy flows in recent weeks into Energy and Financials sector ETFs. By investing in a full sector, and not selecting a single stock, investors reduce their idiosyncratic risk which remains heightened in still fragile conditions as we come out of the pandemic. They can also avoid parts of the stock market which may seem less appealing or expensive, which is not the case if investing via a broad index.
The rewards of sector investing are associated with the dispersion of returns between all the sectors. These have been running at very high levels both through the worst of the COVID crisis and again in recent months. As simple illustration though, let’s look at the difference between the best performing sector and the worst one. In 2020, there was a 77% difference between the total returns of Technology and the Energy sector within the S&P 500 Index as the impact of working at home drove orders for new software services and associated semiconductors in the former sector, whilst a collapse in travel cut the demand for the product and services of latter.
| Year to Date Performance of S&P Sectors | |||
| US | Europe | World | |
| Consumer Discretionary | -3.2% | 5.8% | -2.0% |
| Consumer Staples | -6.3% | -3.5% | -5.9% |
| Energy | 34.2% | 19.3% | 25.5% |
| Financials | 12.1% | 11.6% | 11.0% |
| Healthcare | -2.5% | -2.7% | -3.5% |
| Industrials | 2.9% | 5.0% | 2.3% |
| Technology | -2.9% | 1.9% | -3.0% |
| Materials | 1.4% | 8.8% | 3.1% |
| Communication Services | 4.9% | 3.3% | 4.4% |
| Utilities | -6.6% | -7.3% | -6.9% |
| Real Estate | -0.4% | -4.0% | 0.8% |
Source: Bloomberg Finance L.P., State Street Global Advisors, as of close on 4th March 2021. Figures available in SPDR’s Sector Compass March Update
And that’s where sector investing is so exciting, because since the start of 2021 the positioning has reversed, with S&P Energy up 34% and Technology -3%.
Now all you need to do is pick the right sector!
