CIO Insights: Sector Investing and Correlations

Oct 31, 2017

I’ve always found sector investing fascinating. There’s an excitement that comes with mixing and matching sectors by way of their various correlations.

Sector diversification, including through sector ETFs, can be an effective a strategy for changing market conditions. It can also help reduce sector concentration risks associated with certain high yield strategies. The reason is twofold. First, sectors may not move together in price. And second, they can have low correlations. In fact, some sectors have a long history of different performance patterns.

In the US, typically, economic, regulatory, legislative, and political events have had similar effects on the underlying stocks in a portfolio. As a result, history shows their prices tend to move together. Even across sectors many stocks are related, so certain sectors tend to be highly correlated. For example, Financials and Consumer Discretionary stocks depend on credit markets and interest rates. Energy and Materials stocks often benefit during economic upswings, as they provide necessary raw inputs to many other industries.

Where it gets interesting is when sectors that are not correlated are combined. Here lies the real potential advantage to sector investing. Generally, the varied nature of the businesses of the constituent industries means low price correlations over time. For example, adding the traditionally defensive characteristics of Utilities stocks to a portfolio of technology-related growth stocks should help manage portfolio risk in many different market environments. Should the situation dictate, incorporating additional sectors to the mix could compound the diversification benefits as well.

Of course, investors should be aware that all sectors might sustain losses and move in tandem to the downside during periods of market disruption.

S&P 500 Sector Correlation Matrix (1996-2017)

Sector Correlations

Related Funds

Global X Thematic ETFs

Given thematic investing’s agnostic approach to geographies and sectors; it can have low correlations to other portfolio strategies, which can be particularly useful for investment managers seeking to diversify sources of growth.

Category: Commentary

Topics: Macroeconomic

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds’ full or summary prospectus, which may be obtained by calling 1-888-GX-FUND-1 (1.888.493.8631), or by visiting Read the prospectus carefully before investing.

Global X Management Company LLC serves as an advisor to Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC.

Investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or guarantee against a loss.  Narrowly focused investments may be subject to higher volatility. This information is not intended to be individual or personalized investment or tax advice.  Please consult a financial advisor or tax professional for more information regarding your situation.