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.
SEE MORE: 11 Sector ETFs for a Diversified Investment Portfolio
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.
Crude oil has also had an effect on more energy-sensitive sectors, including energy and to a somewhat lesser extent, materials and industrials. These three sectors underperformed when oil prices tanked. In contrast, consumer staples, health care and consumer discretionary outperformed when crude oil returns declined in excess of 10% over a 12-month period.
When it comes to investors, Fidelity has found that a lot of people are either under- or over-exposed to specific segments of the market. In comparing 5.5 million household accounts of Fidelity customers, 47% of investors held no exposure to utilities and 42% had no exposure to telecoms. Fidelity also revealed that 86% of investors had less exposure to consumer staples than the S&P 500’s 10% tilt. Meanwhile, over 40% of investors held at last one sector position that was over 30 percentage points higher than that found in the S&P 500 Index.
SEE MORE: Sector ETF Positioning for the Rest of the Year
To get a better sense of how the markets allocate toward the various market segments, the SPDR S&P 500 (NYSEArca: SPY) includes 20.8% tech, 15.9% financials, 14.9% health care, 12.3% consumer discretionary, 10.1% consumer staples, 10.0% industrials 7.1% energy, 3.3% utilities, 2.0% materials and 2.7% telecom.
Investors can utilize ETF options to gain cheap, efficient and easily accessible sector exposure, including:
- Fidelity MSCI Consumer Discretionary Index (NYSEArca: FDIS)
- Fidelity MSCI Consumer Staples Index ETF (NYSEArca: FSTA)
- Fidelity MSCI Energy Index ETF (NYSEArca: FENY)
- Fidelity MSCI Financials Index ETF (NYSEArca: FNCL)
- Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC)
- Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU)
- Fidelity MSCI Information Technology Index ETF (NYSEArca: FTEC)
- Fidelity MSCI Materials Index ETF (NYSEArca: FMAT)
- Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM)
- Fidelity MSCI Utilities Index ETF (NYSEArca: FUTY)
- Fidelity MSCI Real Estate Index ETF (NYSEArca: FREL)
For more information on the market sectors, visit our sector ETFs category.