The Utility of Sector Investing

Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing also is subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.

Successful sector investing depends on an individual’s ability to consistently and accurately determine when to rotate in and out of the various sectors, which may be a challenge for most investors.

Sector Investing Strategies

There are a number of ways to implement sector investing, depending upon your objective.

Portfolio Carve-Out: This approach dedicates a portion of your portfolio to seek opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, potentially a Consumer Discretionary sector would be a consideration.

Risk Management: Because the correlations between different sectors can be lower than those between general categories (e.g., value vs. growth or large vs. small cap), investors may be able to build a portfolio of sectors that potentially may reduce overall investment risk.

Portfolio Completion: This strategy targets sectors that may be underrepresented in a current portfolio. For instance, if precious metals or real estate exposure is lacking, you can use sector investment to gain that exposure.

Successful sector investing may be a challenge for most investors, but it could present an opportunity for those who do their homework.

1. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
2. VisualCapitalist.com, 2021
3. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

The content is developed from sources believed to be providing accurate information.The information in the material in not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professional for specific information regarding your individual situation. The opinions expressed and material provided are for general information, should not be considered a solicitation for the purchase or sale of any security.

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