Sector investing — it’s a typical strategy for advisors if their clients are looking beyond broad market exposure by targeting a specific sector. The concept is fairly straightforward, but implementing the strategy is not as simple as it sounds. Identifying sector strength and pivoting core portfolios to capture present as well as future upside can be a juggling act.
Thankfully, Matthew Bartolini, global head of research at Strategists State Street Investment Management (SSIM) and Anqi Dong, global head of sector strategy at SSIM, helped to clarify sector investing further and offer actionable strategies. Moderated by TMX VettaFI Head of Research Todd Rosenbluth, the experts at SSIM delved into the mechanics of sector investing in a webinar: Do More for Your Core: An Advisor’s Guide to Sector Investing.
Defining Sector Investing and Its Benefits
Before diving into the nuts and bolts of sector investing, Rosenbluth posed a question to the webinar attendees: What is your current allocation to sectors? As it so happens, the majority of poll respondents answered with “11% to 25%.” This portends to some usage of sector investing, but was the audience aware of the various ways they can implement the strategy? That question was answered as the webinar progressed.
The panel came together on a baseline definition for sector investing before discussing strategies. SSIM offered their own interpretation of the strategy given their vast expertise and experience.
A sector is a “group of stocks with a lot of shared economic properties,” said Bartolini, noting that these stocks “use shared sensitivities as part of the investment process.”
When using this sector-specific grouping, advisors have the opportunity to pursue alpha by overweighting potential winners and then subsequently underweighting losers. This is especially the case with sector investing, as sector leadership often changes. From a historical perspective, sectors have been shown to exhibit wider performance dispersion compared to other investment styles or factors. In essence, this creates distinct opportunities to achieve excess returns.
“The winners and losers are changing quite frequently because of those shared economic properties of the stocks in the underlying sector,” Bartolini said, mentioning that sectors “will change based on market dynamics, whether it’s through cash flow trends, fundamental trends, economic trends, and volatility characteristics.”
Furthermore, sector ETFs help mitigate idiosyncratic risks associated with single stock picking. As noted in a slide, data from 2006 to 2025 showed that more S&P 500 stocks typically underperform their sector average, which suggests that picking a sector has a higher degree of success compared to picking individual stocks.
Creative Usage
Getting deeper into the webinar, the audience found that sector-specific exposure can address a wide range of portfolio limits as well as offer tangible solutions to a client’s needs. A poll question asked about the top factors when evaluating sector ETFs: 74% mentioned portfolio composition and holdings.
That said, here were some use cases discussed in the webinar:
- Tactical allocation: sector investing can capitalize on shifting business cycles as well as secular trends. For example, during downturns, the momentum can tilt to more defensive sectors like utilities, consumer staples, and health care.
- Customized core exposure: sector investing can offset concentrated exposures, such as tech-heavy weightings in broad indices, which could help better manage client risk profiles.
- Income and tax management: sector investing that involves options-based strategies can not only enhance income, but also expand opportunities for tax-loss harvesting.
“Sectors are very flexible tools,” Dong emphasized. “There are a lot of different use cases that the audience may not have realized.”
12 Sector ETFs to Consider
Lastly, the audience was introduced to State Street’s Select Sector SPDR ETFs. Covering all 11 Global Industry Classification Standard (GICS) sectors, the funds offer the ability to take advantage of sector rotation strategies while maintaining low expense ratios.
- Communication Services Select Sector SPDR ETF (XLC )
- Consumer Discretionary Select Sector SPDR ETF (XLY )
- Consumer Staples Select Sector SPDR ETF (XLP )
- Energy Select Sector SPDR ETF (XLE )
- Financial Select Sector SPDR ETF (XLF )
- Health Care Select Sector SPDR ETF (XLV )
- Industrial Select Sector SPDR ETF (XLI )
- Materials Select Sector SPDR ETF (XLB )
- Real Estate Select Sector SPDR ETF (XLRE )
- Technology Select Sector SPDR ETF (XLK )
- Utilities Select Sector SPDR Fund (XLU )
For an all-in-one solution to sector rotation, State Street also offers the SPDR SSGA US Sector Rotation USD (XLSR ). At 70 basis points, XLSR offers an actively managed solution that leverages SSIM’s portfolio managers with the requisite expertise in sector rotation strategies.
For more information on State’s Street sector ETFs, click here.
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