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Is Now the Time for Sector Investing?

By:

Head of SPDR Americas Research

The current market environment appears highly conducive to sector investing based on two variables: correlation and dispersion.

Broad-based equities have registered gains so far this year, supported by accommodative monetary and fiscal policies, encouraging economic data and higher COVID-19 vaccine rates than case rates. Yet, this is not just a broad beta rally.

The current market environment appears highly conducive to sector investing based on two variables: correlation and dispersion. Simply put, a high dispersion of returns across sectors indicates opportunities to generate alpha by correctly over- and under-weighting certain market segments. And a low pairwise correlation across sectors, where assets are moving more independently from one another, means returns are not clustered around one driving market force.

Sector return dispersion elevated

Return dispersion equates to the difference between the best- and worst-performing asset (in this case, S&P 500 GICS Sectors) within a group over a specified period. Here, we analyzed three-month and six-month return periods. As shown below, both three- and six-month return dispersions (29% and 56%, respectively) are well above the median level historically, as well as in the 80th percentile. In fact, the six-month return dispersion figure is in the 96th percentile.1 And this is not just the by-product of lopping off weaker and more similar returns, as the three-month return dispersion figure has remained above the 80th percentile for 60 consecutive days. That consistency has not been seen since 2008.

sector return dispersion

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Footnotes

1 Bloomberg Finance L.P. as of March 25, 2021
2 Bloomberg Finance L.P. as of March 25, 2021

Glossary

Pairwise correlation
Correlation metrics across many pairs of assets grouped into one average.

S&P 500 GICS Sectors
The Global Industry Classification Standard is an industry taxonomy developed in 1999 by MSCI and Standard & Poor’s for use by the global financial community. The GICS structure consists of 11 sectors.

Originally Posted on April 1, 2021 – Is Now the Time for Sector Investing?

Disclosures

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

The views expressed in this material are the views of SPDR ETFs and SSGA Funds Research Team through the period ended March 25, 2021 and are subject to change based on market and other conditions and do not necessarily represent the views of State Street Global Advisors or any of its affiliates. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or
developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such.

Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

Diversification does not ensure a profit or guarantee against loss.

Because of their narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Concentrated investments in a particular sector or industry tend to be more volatile than the overall market and increases risk that events negatively affecting such sectors or industries could reduce returns, potentially causing the value of the Fund’s shares to decrease.

Passively managed funds invest by sampling the Index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the Index.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. Funds investing in a single sector may be subject to more volatility than funds investing in a diverse group of sectors.

Investing involves risk including the risk of loss of principal.

Growth stocks may underperform stocks in other broad style categories (and the stock market as a whole) over any period of time and may shift in and out of favor with investors generally, sometimes rapidly.

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