Incorporating Sector Investing in Portfolio Management
Research Paper
June 20, 2024
Preview
Sector investing offers investors a strategic approach to gaining exposure to distinctive segments of the economy. Using the sector indexes constructed from the MSCI US Investable Market 2500 Index, which represents the investment opportunity set accessible to U.S. domestic investors, we studied sector investing in the U.S. over the last two decades.
Because sectors vary in their economic, thematic and factor exposures, as well as their sustainability and climate profile, degree of concentration and fundamental characteristics, their performance behavior has differed as macroeconomic conditions have changed.
We found that, over the last two decades ending May 2024, most U.S. sectors had low performance correlations, suggesting that investors could have built portfolios using sector rotation strategies to potentially improve performance or combined less-correlated sectors to reduce portfolio risk.
Calendar-year active returns of US sectors
Data period from Dec. 31, 2003, to Dec. 29, 2023. The plot shows the calendar-year active returns of the U.S. sector indexes compared to those of the MSCI US Investable Market 2500 Index. Returns are gross in USD.
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