SPOTLIGHT
Sector Investing
Sectors can provide targeted exposure to specific segments of the economy, providing an opportunity to help investors potentially enhance returns and manage risk.
Utilizing a disciplined business cycle approach, it is possible to identify key phases in the economy and use those signals in an effort to increase precision in portfolio precision.
- Business Cycle
- Opportunistic
- Defensive
- Preemptive
Understand the business cycle and the opportunities it can provide
By recognizing which sectors may outperform or underperform during particular phases of the business cycle, you can use sectors to target a specific client objective.
Early cycle
Economically sensitive sectors may tend to outperform, while more defensive sectors have tended to underperform.
Mid cycle
Making marginal portfolio allocation changes to manage drawdown risk with sectors may enhance risk-adjusted returns during this cycle.
Late cycle
Defensive and inflation-resistant sectors have tended to perform better, while more cyclical sectors underperform.
Recession
Since performance generally has been negative during recessions, investors should focus on the most defensive, historically stable sectors.
Source: Fidelity Investments (AART).
Potentially enhance returns
Potentially boost client returns by investing in a sector that has historically outperformed during a given phase of the business cycle.
In a Growing Economy
Consider energy.
It has had the highest volatility relative to all sectors over the past 20 years, which could boost portfolio performance.
It has often outperformed during the early and mid phases of the business cycle when the economy is growing.1
As the Economy Slows Down
Consider consumer staples and utilities sectors.
They usually outperformed during the late and recession phases of the business cycle when the economy is slowing or shrinking.1
They have had the lowest volatility relative to all sectors over the past 20 years, which may lower portfolio risk.
Note: The typical business cycle shown above is a hypothetical illustration. There is not always a chronological progression in this order, and there have been cycles when the economy has skipped a phase or retraced an earlier one.
Source for sector performance during business cycle: Fidelity Investments (AART). Sectors shown in the shaded areas of the business cycle have either over- or underperformed versus the U.S. equities market during a particular phase of the business cycle, from 1962 to 2021. Annualized returns are represented by the performance of the top 3,000 U.S. stocks measured by market capitalization, and sectors are defined by the Global Industry Classification Standard (GICS). Past performance is no guarantee of future results.
Lower volatility and manage risk
If you are targeting opportunities to help manage risk in a client's portfolio, you may want to invest in sectors that have been economically insensitive and have had lower volatility.
Sectors can be an effective tool for managing equity risk.
Source: Fidelity Investments, as of December 31, 2023.
The chart above represents the volatility of sectors as compared with the market as a whole. If market volatility averaged 15% during that period, sectors with higher percentages were more volatile, and sectors with lower percentages were less volatile. Past performance is no guarantee of future results. Source: Fidelity Investments, as of 12/31/23. U.S. equity market sector volatility is represented by the standard deviation of the MSCI 25/50 IMI GICS indices except for Real Estate which uses the DJ US Real Estate index for sufficient history. US Equity Market represented by the Russell 3000 index. Standard deviation measures the historical volatility of a fund. The greater the standard deviation, the greater the fund's volatility. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund or ETF.
Protect from inflation
Potentially help a client protect purchasing power by investing in commodity-type sectors that have historically done well as inflationary pressures build.
Energy has typically performed well during the late phase of the business cycle.
Full-phase average annual performance
Forecasting increased inflation?
Consider energy sectors.
As the economic recovery matures and inflationary pressures build, the energy sector has typically performed well.1
Includes equity market returns from 1962 through 2020. Returns are represented by the top 3,000 U.S. stocks ranked by market capitalization. Sectors as defined by GICS. Source: Fidelity Investments (AART) as of March 31, 2021. Past performance is no guarantee of future results.
Sector Investing Basics
Want to learn more?
Read about how a business cycle approach to equity sector investing may add value as part of an intermediate-term investment strategy.
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1. “The Business Cycle Approach to Sector Investing,” Fidelity Investments (AART), June 2024. The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Economically sensitive assets include stocks and high-yield corporate bonds, while less economically sensitive assets include Treasury bonds and cash. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Source: Fidelity Investments (AART), as of March 31, 2023.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. A sector fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers. Each sector fund is also subject to the additional risks associated with its particular industry.
Investing involves risk, including risk of loss. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.
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The S&P 500® index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500® is a registered trademark of Standard & Poor's Financial Services LLC. The Russell 1000® Index is a stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000® Index, which represents about 90% of the total market capitalization of that index. Sectors and industries are defined by the Global Industry Classification Standard (GICS®). The S&P 500 sector indexes include the 11 standard GICS sectors that make up the S&P 500® index. The market capitalization of all S&P 500® sector indexes together comprises the market capitalization of the parent S&P 500® index; each member of the S&P 500® index is assigned to one (and only one) sector. Sectors are defined as follows: Communication Services: companies that facilitate communication or provide access to entertainment content and other information through various types of media. Consumer Discretionary: companies that provide goods and services that people want but don't necessarily need, such as televisions, cars, and sporting goods; these businesses tend to be the most sensitive to economic cycles. Consumer Staples: companies that provide goods and services that people use on a daily basis, like food, household products, and personal-care products; these businesses tend to be less sensitive to economic cycles. Energy: companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, or other energy-related services and equipment, including seismic data collection; or the exploration, production, marketing, refining, and/or transportation of oil and gas products, coal, and consumable fuels. Financials: companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, and insurance and investments. Health Care: companies in two main industry groups: health care equipment suppliers and manufacturers, and providers of health care services; and companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products. Industrials: companies whose businesses manufacture and distribute capital goods, provide commercial services and supplies, or provide transportation services. Materials: companies that are engaged in a wide range of commodity-related manufacturing. Real Estate: companies in two main industry groups—real estate investment trusts (REITs), and real estate management and development companies. Technology: companies in technology software and services and technology hardware and equipment. Utilities: companies considered to be electric, gas, or water utilities, or companies that operate as independent.