With the mid-term election dust settling, ETF investors can now consider the state of sector investing and look to opportunities that may lie ahead.
On the recent webcast (available On Demand for CE Credit), Sector Outlook: Year-End Investment Opportunities to Consider, Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, argued that investors could look to sector-specific strategies to generate improved diversification benefits and potentially enhance returns.
“Correlations between sectors vary markedly, potentially providing another source of diversification to an equity portfolio,” Bartolini said.
Furthermore, “among the sectors, there is a wide dispersion of returns, providing investors opportunities to add value by overweighting winners and underweighting losers,” he added.
Looking ahead, as the U.S. pushes further toward the end of the business cycle, investors should also be aware that sector performance varies in each phase of the business cycle. Investors could also tilt towards outperforming sectors in the cycle to benefit from the economic shifts. Specifically, Bartolini pointed out that consumer staples, health care and industrial sectors typically outperform during the so-called slowdown period of a business cycle when economic growth starts decelerating but remains positive, the economy runs beyond its full capacity and monetary policy becomes restrictive.
Investors may look to traditional sector plays like the Health Care Select Sector SPDR ETF (NYSEArca: XLV), Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP) and Industrial Select Sector SPDR (NYSEArca: XLI) in the late economic cycle to remain in the game and benefit from the economic shifts.
“Because sectors are closely aligned to specific economic variables, they can help investors harness macro trends or shifts in economic fundamentals,” Robert Forsyth, Head of SPDR Americas Investment Strategy for State Street Global Advisors, said.