Investment Primer: The Sector & Industry Composite

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What, Why, and How of Sector & Industry Funds

The Sector & Industry composite includes funds that provide targeted exposure to specific economic sectors (e.g., Technology, Health Care, Financials) or more granular industries (e.g., Semiconductors, Biotechnology, Banks). The “why” behind these funds is to allow for precise, tactical, and strategic positioning within an equity portfolio. Unlike broad market funds, these are concentrated tools used to express a specific view on a segment of the economy.

The “how” is typically achieved through passive Beta strategies that track a well-known index for a specific sector or industry (e.g., a Technology Select Sector Index). This allows investors to capture the performance of that specific market segment. These funds are primarily used in two ways: strategically, to permanently overweight a sector an investor believes has superior long-term growth prospects, or tactically, to make shorter-term trades based on the economic cycle, market trends, or other catalysts.

Portfolio Construction Approaches

Sector & Industry funds are almost always used as “satellite” positions to complement a core U.S. or global equity holding.

  • Strategic Overweighting (Sector Tilting): An investor might use a broad S&P 500 fund as their core but believe that a specific sector, like Health Care, has unique long-term tailwinds due to demographics. They can add a dedicated Health Care ETF to their portfolio to increase their allocation to that sector beyond its weight in the core index. This is a long-term, strategic bet on the outperformance of that specific sector.
  • Tactical Positioning (Sector Rotation): This is a more active approach where an investor uses a sector fund to make a short-to-medium term trade. For example, an investor might buy a Financials ETF if they believe rising interest rates will benefit banks. This position would be held until the investment thesis plays out, and then potentially sold. Tactical decisions are often informed by a combination of macroeconomic analysis and technical analysis of market trends.

A Practical Guide to Locating Funds in the ETF Action Database

A proper peer group is essential for any comparative analysis. A good starting point is the Sector & Industry ETF Dashboard, which groups all relevant ETFs by their specific focus, with hyperlinks to the ETF Database for deeper analysis.

Foundational Screening: Building the Initial Universe

The first step is to use the top-level classification filters to isolate funds within the Sector & Industry composite.

  • Step 1: Select the Database. Navigate to the ETF, Mutual Fund, or other desired database.
  • Step 2: Filter by Asset Class. Select Asset Class = Equity.
  • Step 3: Filter by Composite. Select Composite = Sector & Industry.
  • Step 4: Filter by Category. To find funds for a specific sector, select the desired Category (e.g., Technology, Health Care, Financials). For more granular searches, use the Group filter to find specific industries (e.g., Semiconductors, Biotechnology).

3.2 Advanced Filtering: Refining Your Peer Group

After the foundational screen, the list can be refined by screening for outliers and unique characteristics.

  • Brand (Issuer): Investors may prefer to stick with established fund providers with long track records.
  • Assets Under Management (AUM): Setting a minimum AUM threshold can screen out smaller funds that may be illiquid or face viability risks.
  • Expense Ratio: Costs are a critical factor, as they are a direct drag on returns.
  • Liquidity (ETFs only): For ETFs, metrics like average daily trading volume and bid-ask spreads are particularly important for tactical trading.

A Framework for Evaluating Sector & Industry Funds

A thorough evaluation of these funds requires a multi-faceted approach that combines top-level performance analysis, a deep look into the fund’s composition, and, for tactical investors, an assessment of market trends using technical analysis.

Risk/Return Analysis: The Importance of Benchmarks

The foundational step is to analyze a fund’s historical risk and return profile against an appropriate benchmark for its specific market segment.

ETF Action assigns a Beta Tracker to each category—a specific, broad-based ETF chosen to represent that sector (e.g., a large, liquid Technology sector ETF for the Technology category). Key metrics from the Risk & Return report should be compared against this Beta Tracker to gauge performance. While the examples below are some of the most common, ETF Action’s comprehensive datasets provide a full suite of risk statistics for deeper insights.

  • Total Return: How has the fund performed over various time periods compared to its sector benchmark?
  • Standard Deviation (Volatility): Was the fund more or less volatile than its benchmark? Some sectors are inherently more volatile than others.
  • Sharpe Ratio: Did the fund provide better risk-adjusted returns?
  • Alpha: Did the fund add value beyond what would be expected based on its market risk?

Quantitative Analysis: The Power of Look-Through Analytics

A fund’s name tells you its sector, but its holdings reveal its actual industry and stock-level exposures. Look-through analysis is critical for understanding the drivers of performance.

  • Industry & Sub-Industry Exposure: This is the most important look-through analysis. A “Technology” fund could be heavily concentrated in Software companies, while another might be dominated by Semiconductor firms. These industry-level bets are the primary drivers of a fund’s performance.
  • Concentration: Look-through data reveals how concentrated a fund is in its top holdings. Sector funds are naturally concentrated, but it’s important to know if the top 10 holdings make up 40% of the fund or 70%.
  • Fundamental Characteristics: Look-through analysis of fundamental data is key to understanding a sector’s profile. An analyst can verify a sector’s style tilt by examining its aggregate valuation multiples (like P/E and P/B ratios) and growth metrics (like earnings and sales growth). This confirms whether a sector like Technology exhibits strong growth characteristics, while a sector like Utilities shows value and yield characteristics.

While a detailed, manual look-through analysis provides the deepest insights, it can be time-intensive. ETF Action’s derived analytics are designed to simplify this process by providing a completely objective, rules-based framework. For funds in this composite, the Equity – Sector Assignment will almost always be “Sector Specific,” confirming its concentrated nature. The real value comes from the other derived analytics, particularly the factor scores. These scores quantify the intensity of a fund’s characteristics—such as its Value, Growth, Quality, or Yield tilt—on a numeric scale relative to a broad market benchmark. This allows an analyst to objectively compare the fundamental profile of a Technology fund versus a Consumer Staples fund, providing a powerful framework to more efficiently search for funds and conduct an initial evaluation.

Tactical Evaluation: Using Technical Analysis

For investors using these funds tactically, technical analysis is a crucial part of the evaluation process. ETF Action provides robust datasets to monitor market trends and identify potential entry and exit points.

  • Trend and Momentum: Indicators like moving averages (e.g., 50-day and 200-day) help identify the prevailing trend. The Moving Average Convergence Divergence (MACD) indicator can help confirm trend strength and signal potential reversals. The Relative Strength Index (RSI) is a momentum gauge that helps identify overbought (>70) or oversold (<30) conditions.
  • Relative Strength: A key component of sector rotation is analyzing a sector’s performance relative to the broader market. By comparing a sector ETF’s price chart to that of a broad market ETF (like an S&P 500 fund), a tactical investor can identify sectors that are leading or lagging the market.
  • Volume Analysis: Trading volume can be used to confirm the strength of a price move. A breakout to a new high on strong volume is generally more bullish than one on weak volume, as it indicates strong conviction from traders.

For a tactical investor, manually tracking these indicators across all 11 GICS sectors can be overwhelming. Building watchlists and custom dashboards within the ETF Action platform is essential for an efficient and repeatable process. This allows an investor to monitor key technical indicators for a whole list of target sectors in a single view, making it much easier to spot emerging trends and rotational opportunities.

Qualitative Analysis: Evaluating the Strategy

  • For Passive Funds (Beta): The key is to understand the index methodology. How does the index select and weight companies? Is it market-cap weighted, or does it use an alternative scheme? This is a critical distinction that affects performance.
  • For Active Funds (Tactical): The focus is on the manager’s process. How do they select individual stocks within the sector? The qualitative review should confirm that the manager’s philosophy is reflected in the portfolio’s look-through characteristics.

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