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Is sector investing the same as sector rotation?

Sector investing

means investing in a little piece, or segment, of the overall market. That segment can be a particular industry sector or a particular country.

Sector rotation

takes this investment strategy one step further. A mutual fund manager, for example, will move in and out of different industries or possibly different countries in anticipation of an upward trend in a particular industry or country market index.

Sector investing differs from the more common diversified approach

in which the strategy is to spread your investment eggs among a variety of different market baskets. Sector investing zeros in on one industry or country and sector rotation shifts from one industry to another.

Why is sector investing attractive?

Numerous studies have shown that stock selection only accounts for a relatively small percentage of overall portfolio performance. Sector investing is based on the presumption that industry and country selection are more important than individual stock selection.

The popularity of sector investing has been partly a result of globalization and the use of derivatives that make entering and exiting sectors much cheaper and quicker. As well, the advent of high-speed information technology has made the global market much more accessible.

Examples of common industry sectors in the market place:

  • Consumer products
  • Retail
  • Energy
  • Financial
  • Health Care
  • Utilities
  • Technology

What influences sector investing?

Economic conditions including interest rate changes, currency fluctuations and commodity price trends, can make one industry or country more attractive than another.

Value and Growth Styles

The sectors are broken down into the market pieces that make up the sector; the stocks themselves. When it comes to stock picking, two styles dominate the market: value and growth. The value style refers to a stock-picking approach that looks for good stocks that are out of favour and undervalued in the market. The growth style looks for stocks that are on the upswing and show promise of further growth. Many money managers today blend the two styles when choosing stocks to make up their portfolios.

Timing

Sector investing and sector rotation are not just about picking the right sectors. It's also important to choose the right time, and know when to enter and exit from sectors.

Risk

When it comes to timing, here is the risk. Investors who put all their investment dollars into one can experience sector tremendous volatility in their portfolios.

Minimizing Risk

Don't put all your eggs in one basket. Holding just one or two sectors does not create a balanced portfolio. The risk of choosing the wrong sector at the wrong time increases. Sector investing should be just a part of your overall portfolio strategy.

Long-term investing further reduces risk. By allowing room for cyclical upswings in sector industries, long-term gains may be realized.

Further information

How to be a Sector Investor, by Dr. Larry Hungerford and Steve Hungerford, McGraw-Hill, 1999 publication.