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.