Many advisors and investors have utilized sector exchange traded funds to gain exposure to targeted areas of the market. However, maintaining the right mix of these various sectors is equally important.
“Given the importance of a stock portfolio’s sector mix to its outcome, monitoring a portfolio’s sector mix may be one of the most important – yet often overlooked – efforts that can be pursued by an advisor,” Fidelity strategists, led by Scott O’Reilly, said in a research note.
Fidelity has found that over the past 25 years, sector exposure has had a larger impact on stock returns than style and market-cap combined, so investors should pay attention to their sector exposure to achieve a desired outcome or to better control for risks.
For instance, different market environments can produce various effects on sector returns. During periods of accelerating U.S. economic growth, more economically sensitive sectors, like technology, consumer discretionary, industrials and financials, have outperformed on average between 1962 and 2015 while defensive sectors, like utilities and telecom services, underperformed. During periods of decelerating economic growth, defensive stocks outperformed more economically sensitive sectors since the products or services are more likely to be in demand regardless of the economic state.
Sectors also show sensitivity to interest rate changes. When the 10-year Treasury bond yield falls or rises by more than 50 basis points over a 12-month period, rate-sensitive sectors, like utilities, telecom, and consumer staples, have either out- or under-performed. For example, with rates depressed and bond yields low, utilities has been the best performing sector this year.