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The Rise Of Sectors: Active And Passive Applications

Mar. 08, 2018 9:24 AM ET1 Comment
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S&P Dow Jones Indices

By Tim Edwards

Investment strategies that switch between sectors or industries - and the related activity of using sectoral performances to discern broader macroeconomic trends - have long been a part of professional investing. However, it is surprisingly difficult to find even basic research explaining how sectors are classified, why they are important and how they might be applied to diversification or performance goals. Our newest paper offers an introduction to these topics.

The increasing adoption of index-linked products over the past several years is a major defining trend within the investment industry. The consequences, naturally, remain a topic of debate. Sometimes, the argument frames "active" investors as an opposing tribe to "passive" investors; either blindly following the whole market or endlessly (fruitlessly) picking single stocks in the hope of outperformance. Such simplifications are unhelpful at best - investing doesn't work like that.

Instead, both passive- and actively-inclined investors must make decisions around a host of shared criteria: risk tolerances, income or growth preferences, asset allocations, inflation sensitivities, time horizon, moral and ethical considerations, regulatory conditions, and so on. They also ought to consider the appropriate benchmarks for their performance carefully. Facing the same problems, it is not surprising that they might find similar solutions.

One example of how the ETF market has offered solutions for both "tribes" is provided by the greater availability of liquid products providing access to broad benchmarks such as the S&P 500®. Active investors can use such products to express tactical views efficiently on the broad U.S. market. Passive investors might use them to make long-term, diversified allocations to U.S. equities. Sector-based products similarly offer tools for diversification, or timing.

Sectors are particularly important for relating broader events to their market effects. The grouping of companies into peer groups facing similar circumstances can diminish the

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At S&P Dow Jones Indices, our role can be described in one word: essential. We’re the largest global resource for index-based concepts, data and research, and home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. More assets are invested in products based upon our indices than any other index provider in the world; with over 1,000,000 indices, S&P Dow Jones Indices defines the way people measure and trade the markets. We provide essential intelligence that helps investors identify and capitalize on global opportunities. S&P Dow Jones Indices is a division of S&P Global, which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spdji.com.Copyright © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI please visitwww.spdji.com. For full terms of use and disclosures please visit www.spdji.com/terms-of-use.

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Comments (1)

Not to be unkind, but this SA contribution told me little about ETF sector investing....
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