Sophisticated Sector Investing Strategies for Expanded Diversification

Today’s business headlines include ongoing discussions about persistent inflation, rising interest rates, and continued volatility in the securities markets. How you respond to these headlines is up to you, but having a documented strategic investment strategy can be a step in the right direction. 

As an Austin-based investment firm, Beck Capital Management understands the importance of building a diversified portfolio that seeks to provide competitive returns and manage risk in fluctuating markets. That’s why we believe in sector investing strategies that may help improve your ability to diversify your portfolio’s holdings and manage your exposure to risk.  

Sector investing helps you tap into broad securities market trends while targeting sectors that could perform better given the current macroeconomic environment. Plus, in our experience, the broad market is predominantly driven by only a few sectors – maintaining diversified exposure across sectors can aid investment returns and better diversify your portfolio. 

In this blog, we’ll look at ten sector investing strategies designed to help you diversify your portfolio and navigate the complexities of today’s financial markets.  

Read Our Latest Quick Guide: A GUIDE TO UNDERSTANDING ASSET LOCATION VS ASSET ALLOCATION

1. Sector Rotation

The concept for section rotation investing is simple: invest in sectors performing well at different stages of the current economic cycle. For example, consumer discretionary and technology sectors often do well during economic expansions, while utilities and consumer staples might perform better during recessions. 

Using historical data and in-depth analysis, your Austin investment managers can identify potential opportunities to rotate in and out of various sectors. 

Watch our new podcast: The Benefits of Having a Financial Advisor: Is it Worth the Cost? 

2. Thematic Investing

Focus on sectors poised to benefit from long-term trends, such as the 78 million baby boomers who will need additional healthcare services, tech stocks for an increasingly digital world, and utilities for a world that needs increasing electricity generation volumes.  

Within a broad sector, you can target specific sub-sectors or industries expected to outperform the broad sector. For instance, you might focus on cybersecurity or artificial intelligence within the technology sector. 

3. Quantitative Sector Strategies

An Austin financial advisor can use quantitative models to select sectors based on value, momentum, quality, and low volatility. Combining these factors during the research phase can help identify sectors with the potential for enhanced risk-adjusted returns. 

As technology advances, many financial planners in Austin use machine learning algorithms and artificial intelligence to analyze large datasets and identify patterns or signals that traditional analysis might miss. These models can help forecast sector performance based on multiple variables. 

4. Hedging and Risk Management

Another sector investing tactic that may be appropriate for your situation is using options or structured notes to hedge sector exposures. For example, buying structured notes on attractive sector indices can protect against downside risk, while covered call strategies can generate additional income. 

Inverse ETFs may make sense tactically to profit from declines in specific sectors. These can be useful for short-term hedging or speculation based on the future performance of the securities markets. 

Watch our short video: How to Balance a Portfolio. 

5. Global Sector Allocation

Not all the best companies are headquartered in the U.S. They can be headquartered outside the U.S. and conduct most of their business inside the U.S. 

Investing in sectors with a global reach is another way to take advantage of foreign markets’ performance. For instance, the US might drive technology, while global economies may have other strengths in their home markets—for example, the developing supply chains in Mexico and India. 

Another offshoot of global sector allocation is currency hedging, which allows you to protect your investments from the risk of adverse current fluctuations. When you invest internationally, changes in exchange rates can impact your rates of return. 

Currency hedging involves using financial instruments like futures, options, and forward contracts to lock in exchange rates. This can be particularly useful for investments in foreign stocks, bonds, or other investments impacted by currencies. 

Let’s say you have invested in a European stock fund. If the euro weakens against the dollar, the value of your investment could decrease even if the European stocks perform well. Investing in ways that avoid currency risk allows you to benefit from international exposure without the risk associated with currency movements. 

6. Event-Driven Strategies

Consider focusing on sectors that have high mergers and acquisition potential. This activity may allow you to capitalize on significant price movements over time.  

If you use this strategy, you should anticipate the possible impacts of regulatory changes on specific sectors. For example, changes in healthcare policy can significantly impact the performance of pharmaceutical and insurance company stocks. 

7. Environmental, Social, and Governance (ESG) Investing

A growing trend is investing in sectors that align with ESG criteria. This may include renewable energy, sustainable agriculture, and companies with strong governance practices. These trends may lead to under or overperformance of individual companies and sectors, so they should be accounted for in financial analysis. 

By incorporating ESG factors into your sector strategy, you may be able to identify risks and opportunities that are not evident using traditional financial analysis. 

8. Leveraged Sector Exposure

Another sector strategy for increasing exposure to certain industries is using leveraged sector exposure, such as borrowed capital or financial derivatives. This can enhance your level of diversification by increasing your investments in the securities markets.  

Here’s how it works: 

Let’s say you have a diversified portfolio consisting of: 

• 50% in broad U.S. stocks (index funds)
• 30% in bonds
• 10% in international stocks
• 10% in real estate

You believe the technology sector will outperform in the coming years but don’t want to sell your current holdings to increase your tech exposure. Instead, you use leveraged sector ETFs to gain the desired exposure without disrupting your existing portfolio. 

You’ve effectively increased your tech sector exposure from 0% to 10% without selling existing assets. Adding a new sector can enhance diversification and potential returns, and leveraged ETFs allow you to pursue desired exposure with less capital of your own, freeing up funds for other investments or interests. 

9. Margin Trading

Consider using margin accounts to borrow funds and increase your sector exposure. This strategy can magnify gains and losses and should be used cautiously. 

10. Income-Oriented Sector Investing

Focus on sectors with a history of dividend growth, such as utilities, consumer staples, and healthcare. These sectors can provide a stable income stream and the potential for capital appreciation. 

Another consideration is investing in Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs) to increase exposure to the real estate and energy sectors. 

Next Steps 

Each of these strategies involves different levels of complexity and risk, and it’s essential to align them with your overall investment objectives, timelines, and risk tolerance. Combining several coordinated approaches can help create a diversified and sophisticated sector investment strategy. 

Connect to learn more about Beck Capital Management’s sector investing strategies.

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice.  Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. 

Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. 

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market.  They are methods used to help manage investment risk. 

Rebalancing can entail transaction costs and tax consequences that should be considered when determining a rebalancing strategy. 

Past performance is no guarantee of future results. Investing in the stock market involves gains and losses and may not be suitable for all investors.   

There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. 

Sector Strategies: Portfolios that invest exclusively in one sector or industry involve additional risks. The lack of industry diversification subjects the investor to increased industry-specific risks. 

Beck Capital Management does not offer legal or tax advice. This information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult with a qualified professional. 

There is no guarantee that integrating Environmental, social, and governance (ESG) analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate. 

Alternative investments, including hedge funds, commodities, and managed futures involve a high degree of risk, often engage in leveraging and other speculative investments practices that may increase risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are subject to the same regulatory requirements as mutual funds, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. 

A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.  There are risks associated with these types of investments and include but are not limited to the following:  Typically no secondary market exists for the security listed above.  Potential difficulty discerning between routine interest payments and principal repayment.  Redemption price of a REIT may be worth more or less than the original price paid.  Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.  This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein.  The offering is made only by the Prospectus. 

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. 

Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled “Characteristics and Risks of Standardized Options,” which outlines the purposes and risks of option transactions. This booklet is available from your Financial Advisor or at http://www.theocc.com/about/publications/character-risks.jsp.  Supporting documentation of claims will be supplied upon request. 

Mutual Funds and Exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.