Today’s market continues to evolve at a rapid clip. That said, traditional broad market exposure is unable to accurately capture long-term secular trends. Hence, the rise of thematic funds this year. However, are advisors aware that they can mix and match sector ETFs to get thematic exposure?
Enhancing a core portfolio through the strategic use of sector-specific ETFs allows for targeting themes without the concentration risk associated with single stock exposure. It’s one of the many topics discussed when Matthew Bartolini, global head of research at Strategists State Street Investment Management (SSIM) and Anqi Dong, global head of sector strategy at SSIM, discussed sector investing with TMX VettaFI Head of Research Todd Rosenbluth in a webinar: Do More for Your Core: An Advisor’s Guide to Sector Investing.
Thematic Investing Through a Sector Lens
Exposure to thematic investing can not only add diversification to a core portfolio, but it also captures powerful, transformative trends that create disruptive forces in various industries. As noted during the webinar, strategic allocations to sector ETFs can serve as powerful vehicles to capture themes such as the following:
- Artificial Intelligence & Robotics: This mega-theme is a confluence of the tech sector at both the hardware and software level, the communications sector for digital advertising efficiency, and a utilities sector that addresses the massive power demands required by AI data centers. A use case of this mix of sectors will be presented later in this article.
- Healthcare Innovation: The healthcare sector is undergoing a transformative shift driven by advancements in technology and demographic shifts.
- Industrial Revitalization: Shifts in global supply chains are leading to more automation in manufacturing, infrastructure spending, and defense modernization in the industrial sector.
- Fintech & Blockchain: The financials sector continues to evolve beyond traditional banking with digital payment processing and asset tokenization.
AI: A Sector Investing Use Case
During the webinar, Dong offered an example of capturing the AI theme via a balanced sector portfolio. Rather than construct a portfolio that leans heavily on high-multiple technology stocks, a portfolio can utilize an equal-weighted blend of tech, communication services, and utilities. More specifically, a combination of the Technology Select Sector SPDR ETF (XLK ), Communication Services Select Sector SPDR ETF (XLC ), and the Utilities Select Sector SPDR Fund (XLU ) could serve this purpose.
This strategic mix of ETFs allows for participation in the AI boom that offers benefits beyond capturing this thematic investment theme. These sector ETFs can mitigate the inherent volatility of pure-play tech stocks with communication services that support AI along with utilities that serve as the backbone for the technology.
“The key takeaway is that sectors allow investors to stay invested in powerful trends like AI while also managing concentration and volatility to maximize the benefits of exposure to this transformative theme,” Dong said.
In the end, using these sector ETFs for thematic exposure offers structural advantages over thematic funds. At just eight basis points, State Street’s sector ETFs offer a cost-efficient solution with the transparency, intraday flexibility, and tax efficiency of the ETF investment vehicle. By leveraging these sector ETFs, investors can reposition their portfolios for capturing the growth of secular trends without sacrificing the structural stability offered by their existing core holdings.
For more information on State Street’s sector ETFs, click here.
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