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2019 Opportunities in Market Sector ETFs

This article was originally published on ETFTrends.com.

With the mid-term election dust settling, ETF investors can now consider the state of sector investing and look to opportunities that may lie ahead.

On the recent webcast (available On Demand for CE Credit), Sector Outlook: Year-End Investment Opportunities to Consider, Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, argued that investors could look to sector-specific strategies to generate improved diversification benefits and potentially enhance returns.

"Correlations between sectors vary markedly, potentially providing another source of diversification to an equity portfolio," Bartolini said.

Furthermore, "among the sectors, there is a wide dispersion of returns, providing investors opportunities to add value by overweighting winners and underweighting losers," he added.

Looking ahead, as the U.S. pushes further toward the end of the business cycle, investors should also be aware that sector performance varies in each phase of the business cycle. Investors could also tilt towards outperforming sectors in the cycle to benefit from the economic shifts. Specifically, Bartolini pointed out that consumer staples, health care and industrial sectors typically outperform during the so-called slowdown period of a business cycle when economic growth starts decelerating but remains positive, the economy runs beyond its full capacity and monetary policy becomes restrictive.

Investors may look to traditional sector plays like the  Health Care Select Sector SPDR ETF (XLV) , Consumer Staples Select Sector SPDR ETF (XLP) and Industrial Select Sector SPDR (XLI) in the late economic cycle to remain in the game and benefit from the economic shifts.

"Because sectors are closely aligned to specific economic variables, they can help investors harness macro trends or shifts in economic fundamentals," Robert Forsyth, Head of SPDR Americas Investment Strategy for State Street Global Advisors, said.

As investors look to sector plays to enhance their portfolio, Bartolini explained that there are a number of sector strategy implementation approaches, including a top-down, thematic, bottom-up or technical investment strategy. Through the top-down approach, an investor would survey macro economic variables, analyze business cycles and position towards sectors that may benefit from changes in macroeconomic environment. The thematic approach is used to identify secular industry trends and harness a long-term growth trend within a particular segment of the economy. A bottom-up approach evaluates sector fundamentals, such as valuations and earnings trends, and positions towards sectors that show attractive valuations and/or strong sentiment. Lastly, the technical approach would overweight/underweight sectors based on recent performance.

For example, in a top-down approach, the utilities, consumer staples and health care sectors have historically outperformed during a recession to help navigate market downturns.

Looking ahead, Forsyth believed that intelligent infrastructure could be a thematic opportunity as investors gain exposure to companies helping develop smart buildings and roads, sensors, and intelligent meters, which may benefit from the transition to an intelligent, adaptive, and connected infrastructure and increasing demand in infrastructure spending in coming years. For instance, the SPDR Kensho Intelligent Structures ETF (XKII) includes companies whose products and services are driving innovation behind intelligent infrastructure.

"An intelligent infrastructure sector exposure may enhance the growth potential of a portfolio by capturing a long-term secular growth trends," Forsyth said.

Along with the new technologies theme, something like the broader SPDR Kensho New Economies Composite ETF (KOMP) , which includes “New Economy” industries, ranging from 3D printing to genetic engineering, can provide investors access to a comprehensive and diversified set of companies propelling the new economy.

Financial advisors who are interested in learning more about the market sectors can watch the webcast here on demand.