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.1,2
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 2016, energy rose 28%, while healthcare fell -2.83%. 3
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.4
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.
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 seek opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, potentially a Consumer Discretionary sector would 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.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.