Investment Read Time: 3 min

The Utility of Sector Investing

There is a growing popularity among individuals to broaden their investment strategy beyond conventional allocations and investment styles. Some see sector investing as a way to seek new opportunities for enhanced portfolio performance.1

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 is also 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.

Sectors are made up of companies grouped by similar businesses that range from natural resources to financial services and from technology to consumer staples. In any given year, one sector may outperform another. For example, in 2021, energy rose 47.7%, while utilities only rose 14.1%.2

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.

Investors are further cautioned that some sector mutual funds are capitalization weighted, meaning that they can be very concentrated in a few stocks, so you need to do your homework.3

Remember that mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

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 seeking opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, a Consumer Discretionary sector may 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.

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.

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 this material is 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 professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Managing Your Lifestyle

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Travel, Without the Baggage

Travel, Without the Baggage

Tips to avoid checking in luggage on your next vacation.

Insurance Planning Following Divorce

Insurance Planning Following Divorce

If you are recently divorced, take steps to ensure that you are properly protected.

 

Have A Question About This Topic?







Thank you! Oops!

Business Boosters: Tips for Building a Team

Here are a few tips on how to recruit, hire and onboard employees who fit your culture and share your passion to succeed.

From Seeking Yield to Seeking Profits

How low can you go? We’re not talking about the limbo. We’re referring to sovereign bond rates.

Retirement Planning With Your Special Needs Child in Mind

Having a special needs child adds another layer of complexity to retirement planning. A special needs trust may help.

View all articles

Disability Income

This calculator estimates your chances of becoming disabled and your potential need for disability insurance.

Capital Gains Tax Estimator

Use this calculator to estimate your capital gains tax.

Can I Refinance My Mortgage?

This calculator can help determine whether it makes sense to refinance your mortgage.

View all calculators

Long-Term-Care Protection Strategies

The chances of needing long-term care, its cost, and strategies for covering that cost.

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

Estate Management 101

A will may be only one of the documents you need—and one factor to consider—when it comes to managing your estate.

Questions to Consider When Buying a Vacation Home

Doing your research is key before buying a vacation home.

When the Unexpected Becomes Reality

Disability happens to more people, more often than you may think, and it lasts longer, too.

View all videos