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The process of
continuously rebalancing a portfolio to overweight in strong
performing sectors, and avoiding poor performing sectors.
Sector exchange traded
funds offer pure concentration in a single segment of the economy,
while also providing diversification across the sector by allowing
an investor to but the entire industry segment.
Investing in sectors
is riskier than broad index funds, but less risky than individual
stocks.
The overall market indexes can be though of as
the combined performance of the various sectors in the economy. At
any onetime there will be very strong performing sectors, and some
poorly performing sectors. The average return of these sectors is the
return of the market index. |
"In constructing optimal portfolios we find that sectors offer
higher potential returns and lower correlations compared to
standard equity breakouts based on market capitalization or
investment styles" |
More difficult that you think
Identify and overweight in those sectors that are performing well,
and underweight or avoid poorly performing sectors will consistently
outperform the broad market index. The process of actually doing
this effectively is very time consuming and involves a lot of
complicated mathematical, statistical and technical analysis.
An alternate solution is to join a data service like Active Sectors
that automatically performs the time consuming and arduous tasks of
constantly scanning the market and the requisite data analysis. |
Illustrated example
See how investing in the indexes leading sectors diversifies
portfolio results and also outperforms the major market index.
Benchmark Index: S&P
500 -12% return.
Sector 1 (gold) +43%
Sector 2 (biotech) + 25%
Sector 3 (utilities) + 22%
We could of bought the index and lost 12% for the year under a buy and
hold strategy, or alternatively invested equal amounts among gold,
utilities and biotech to achieve a diversified portfolio gain of 28%.
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