The Fix The Investments Series
With the explosive growth of passive investing since the introduction of the Vanguard 500 (ticker symbol: VFINX) index mutual fund in 1976, and later with the genesis of ETFs in the1990’s, investors now enjoy myriad low-cost and highly diversified possibilities for choosing, holding and managing portfolio investments.
One of the key benefits that both the index fund and ETF industry offered was an investor’s ability to “own” an entire index as a core holding.
As investment methodologies and strategies grew, “tilting” portfolio weightings more heavily toward a specific sector became another potential benefit for investors wishing to seek extra alpha from otherwise standard core passive portfolios.
To illustrate, let’s break down just one index, the S&P 500.
The S&P 500 index has a total value of about $24 trillion, the combined capitalization value of the over 500 stocks in the index, a value that changes every day with every trade. (Yes, there are more than 500 companies, called constituents, represented in the S&P 500, and that number changes from time to time as some companies enter and others exit the index.)
You can “own” the entire S&P 500 by buying an ETF which represents the index, for instance, SPDR® S&P 500 ETF (ticker symbol: SPY) or iShares Core S&P 500 ETF (ticker symbol: IVV) . By owning SPY or IVV you own a full representation of all all eleven domestic industry sectors, and the underlying sixty-nine specific industries that make up the index.
Before ETFs and index mutual funds came along, you would have had to buy over 500 individual stocks or eleven individual sectors to achieve this broad market representation and the diversification that ownership brings.
Now this is where it gets interesting!
Let’s say your research and current outlook tends to favor technology in a general way. Well, there are a few different paths to take: You can bet on an individual company, say Alphabet (ticker symbol GOOG), or you can tilt your portfolio toward the entire Information Technology sector if you favor a more diversified approach.
Whether or not tilting a portfolio is a good idea in the first place is a decision that should be made cautiously and generally only after a discussion with a professional advisor.
To provide a few starting points for that discussion, first be certain that you have clearly defined investing goals and objectives, and personal portfolio management policies in place. Then if Sector tilting still makes sense, take a look at how the S&P 500 currently breaks down into broad sectors to begin your research.
Information Technology
Communications Equipment
Electronic Equipment, Instruments & Components
IT Services
Semiconductors & Semiconductor Equipment Industry
Software
Technology Hardware, Storage & Peripherals
This sector includes many names you’ll know, such as: Microsoft, Apple, and Alphabet (Google).
Health Care Sector
Biotechnology
Healthcare Equipment & Supplies
Healthcare Providers & Services
Healthcare Technology
Life Sciences Tools & Services
Pharmaceuticals
This sector includes many names you’ll know, such as: Johnson & Johnson, Bristol-Myers Squibb, Merck and Pfizer.
Financials Sector
Banking
Capital Markets
Consumer Finance
Diversified Financial Services
Insurance
Mortgage Real Estate Investment Trusts-REITs
Thrifts & Mortgage Finance
This sector includes many names you’ll know, such as: JPMorganChase, Bank of America, Citigroup, MetLife and Visa.
Communication Services Sector
Diversified Telecommunication Services
Wireless Telecommunication Services
Entertainment
Media
Interactive Media & Services
This sector includes many names you’ll know, such as: Comcast, Verizon and Alphabet.
Consumer Discretionary Sector
Automobile Components
Automobiles
Distributors
Diversified Consumer Services
Hotels, Restaurants & Leisure
Household Durables
Leisure Products
Multiline Retail
Specialty Retail
Textile, Apparel & Luxury Goods
Internet & Direct Marketing
This sector includes many names you’ll know, such as: General Motors, Hilton, Nike, Disney, and Starbucks
Industrials Sector
Aerospace & Defense
Air Freight & Logistics
Airlines
Building Products
Commercial Services & Supplies
Construction & Engineering
Electrical Equipment
Industrial Conglomerates
Machinery
Marine
Professional Services
Road & Rail
Trading Companies & Distributors
Transportation Infrastructure
This sector includes many names you’ll know, such as: Boeing, Southwest Airlines, Norfolk Southern and Lockheed Martin.
Consumer Staples Sector
Beverages
Food & Staples Retailing
Food Products
Household Products
Personal Products
Tobacco
This sector includes many names you’ll know, such as: Altria, Procter & Gamble, Coca-Cola and Pepsi.
Energy Sector
Energy Equipment & Services
Oil, Gas & Consumable Fuels
This sector includes many names you’ll know, such as: Chevron, Exxon Mobil and Conoco Phillips.
Utilities Sector
Electric Utilities
Gas Utilities
Independent Power and Renewable Electricity Producers
Multi-Utilities
Water Utilities
This sector includes many names you’ll know, such as: Consolidated Edison, Duke Energy and Dominion Resources.
Real Estate Sector
Equity Real Estate Investment Trusts
Real Estate Management & Development
This sector includes many names you’ll know, such as: Simon Property Group (mall operators), Boston Properties and Crown and Castle.
Materials Sector
Chemicals
Construction Materials
Containers & Packaging
Metals & Mining
Paper & Forest Products
This sector includes many names you’ll know, such as: Dow-Dupont, Corning and International Paper.
What is the intention of this article post?
The intention of this post is not to promote Sector tilting. It is, however, a valid strategy to attempt to squeeze some excess alpha (higher return) out of your portfolio within the context of an objectives-based passive strategy.
Making more money is not a sin! But if your overall goal is to accept the wealth building possibilities that a passive strategy may provide through broad market exposure, then other questions come to mind:
Why do you feel the need to expose your entire portfolio to excess risk in the pursuit of an incrementally small excess return that a very small position tilt may provide? Will the few extra dollars make a difference? Is it about your need to outsmart the market? Do you want to be smarter than the market?
You’re not; neither are we!