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.”
In the current market environment, Matthew Bartolini, Research Strategist at State Street Global Advisors, advises leaning toward potential drivers of economy growth by tactically overalying specific sectors – notably healthcare, consumer discretionary and financials – within a core U.S. equity portfolio.
Specifically, Bartolini singles out regional banks, homebuilders and biotechnology sub-sectors as potential drivers of growth based on earnings and sales expectations, along with marco- and micro-economic trends.
Investors can also capture these areas through diversified sector-specific ETFs, including SPDR S&P Regional Banking ETF (NYSEArca: KRE), SPDR S&P Bank ETF (NYSEArca: KBE), Financial Select Sector SPDR (NYSEArca: XLF), SPDR S&P Biotech ETF (NYSEArca: XBI) and SPDR S&P Homebuilders ETF (NYSEArca: XHB).
Mazza also explained that the financial sector looks especially attractive ahead as the Federal Reserve looks to hike interest rates.
“Based on the beta sensitivity to the US 10 Year Yield, the Financial sector, and its sub-industries, register a strong relationship to an increase in rates due to improved lending and wider margins — specifically regional banks,” Mazza said. “Banks are generally more willing to lend against a backdrop of improving economic conditions – so, to the degree the Federal Reserve’s moves reflect its confidence in the economy, we’d expect lending activity to respond in kind.”
The housing market is set to build up as consumer confidence rises, home sales reached levels not seen since 2007 and homebuilder sentiment is at a decade long high. Moreover, Rowley added that XHB includes a hefty 60% tilt toward household discretionary, which has also benefited from the increase in all home sales. [Warren Buffett’s Ideas On US Economic Growth]
Lastly, Bartolini argues that the aging Baby Boomer generation is fueling an entire new industries, and healthcare in general will continue to benefit from the aging demographics, along with the Obamacare policy changes. Additionally, the strategist added that a flurry of merger and acquisition activity could help boost XBI, which follows an equal-weight methodology that tilts toward smaller potential acquisition targets.
Financial advisors who are interested in learning more about sector strategies can listen to the webcast here on demand.