I just came across a great post on sector investing by Dave Mazza, Head of Research for SSGA's ETF and mutual fund businesses.
There is a lot of great information he walks through, but I thought there were three tidbits particularly interesting to us as risk managers.
First, he points out that investing in index based sector products still offers significant diversification against single stock risk. For example, the median return for large-cap stocks in the energy sector from 9/28/14 to 9/28/15 was -41.95%. During this same time period, the S&P Energy Select Sector Index - a market-cap weighted index of large-cap energy companies - returned -34.75%. This supports why we use sector-based ETFs in many of our tactical equity strategies.
Second, Dave notes that sector dispersion - the difference between the best and worst performing security in any set of securities - is wider than style dispersion (e.g. growth and value). Even more notable, style dispersion has shrunk to near zero over the last 5+ years. Dispersion is the lifeblood of active management. If all of the sectors have the exact same return over a given time frame (i.e. zero dispersion), then there is little or no value to be added by adding and removing sectors to and from the portfolio.
Finally, Dave writes that "sectors consistently account for a larger contribution to equity risk within the S&P 500 Index than do styles." This is crucial since we are first and foremost using tactical signals on sectors to manage equity risk for our clients.
Justin Sibears
Justin is a Managing Director and Portfolio Manager at Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. At Newfound, Justin is responsible for portfolio management, investment research, strategy development, and communication of the firm's views to clients.
Justin is a frequent speaker on industry panels and is a contributor to ETF Trends.
Prior to Newfound, Justin worked for J.P. Morgan and Deutsche Bank. At J.P. Morgan, he structured and syndicated ABS transactions while also managing risk on a proprietary ABS portfolio. At Deutsche Bank, Justin spent time on the event‐driven, high‐yield debt, and mortgage derivative trading desks.
Justin holds a Master of Science in Computational Finance and a Master of Business Administration from Carnegie Mellon University as a well as a BBA in Mathematics and Finance from the University of Notre Dame.
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