Investors interested in positioning their portfolios ahead of changes to major market trends may target specific market segments with sector-specific exchange traded funds.
For instance, on the recent webcast, How Well Do Your Know Your Sectors?, David Mazza, V.P. and Head of Research at State Street Global Advisor, pointed out that the utilities sector was the best performing area int he wake of the Federal Reserve’s September meeting. The Utilities Select Sector SPDR (NYSEArca: XLU) gained over 5% as investors returned to yield-generating assets after the Fed held off on a rate hike in response to global volatility and ongoing uncertainty.
Stepping further out, Mazza explains how S&P 500 market sectors may perform during various business cycles.
“All sectors tend perform well when the economy is growing,” Mazza said. ” Sectors diverge during inflection points in the business cycle, crating opportunities for investors.”
After a rapid market expansion and inevitable slowdown, the markets may move into a contraction. During a market contraction, areas like telecommunication services, utilities, and energy are among the worst performing sectors.
Eventually a rebound takes hold, with industrials, consumer discretionary and consumer staples leading the charge in a market recovery.
Consequently, due to the shifting business cycles, Jared Rowley, Research Strategist at State Street Global Advisors, suggests advisors and investors should adapt their portfolios accordingly.
Investors can “utilize signal to inform position in the business cycle,” Rowley said, “examine historical sector risk/return characteristics during various cycle phases, and over/under weight sectors according to market views, informed by risk/return patterns.”