Seeking Sector Performance

With the stock market flat through much of 2010, more and more advisors are using sector investing strategies. Here’s what they’re banking on: If broader measures of market performance aren’t going to deliver performance, than it’ll have to be industry sectors concentrated in equity segments with the best opportunity.

One significant advantage of sector investing is the ability to customize client portfolios. Advisors can help their clients own the exact pieces of the market to which they want investment exposure. The right sectors can be overweighted whereas the wrong ones can be underweighted or avoided.

Furthermore, sector ETFs are an excellent substitute for individual stocks. Instead of increasing financial risk by owning a single stock like Microsoft or Chevron , owning a technology and energy ETF can help the client gain market exposure but with greater diversification.

To discuss the potential of sector investing, Research conducted a one-on-one interview with Dan Dolan of Sector SPDRs. The firm’s nine ETFs follow the nine S&P 500 industry sectors and have a combined $30 billion in assets.

During tough economic times like these, what industry sectors tend to do well? How about as the economic recovery gains footing?

The real question is, where is the economy going? Sector performance should anticipate economic activity. The economy may be slow today but are we moving forward and recovering or are we moving deeper into recession? If you believe the economy will remain slow for an extended period of time focus on defensive sectors like health care (XLV), consumer staples (XLP) and utilities (XLU). These sectors have consistent earnings and tend to outperform in tough environments. If you feel the worst is behind us and the economy will improve, focus on early cycle sectors like technology (XLK), industrials (XLI), consumer discretionary and materials (XLB). As economic activity expands, earnings can improve rapidly for companies in these sectors.

Over the past few years we’ve seen a string of corporate failures and shocks of epic magnitude. From Enron to Lehman Brothers to BP — investors have been stung badly. How can advisors help their clients to minimize risk?

Sector ETFs can help investors minimize single-stock exposure and avoid investment disasters. By investing in a basket of securities (ETFs) you can take advantage of an investment theme while at the same time significantly reducing portfolio risk. Single-company meltdowns like Enron, Lehman Brothers and BP can be avoided by spreading risk and reducing concentrated equity exposure.

Interest rates are still at rock bottom levels and it’s forced a lot of advisors to rethink their clients’ income strategy. Talk about strategies to help them.