When implementing a sector rotation strategy, different people may use varying guidelines to achieve their goals. Investors, though, may also utilize an exchange traded fund that does the work for them.
For instance, the the actively managed SPDR SSGA Global Allocation ETF (GAL) invests in other ETFs to build a global diversified portfolio comprised of equities, bonds, REITs, TIPs and commodities. When allocating toward sector positions, GAL utilizes quantitative and fundamental components to partition a chunk of its U.S. large-cap exposure for just market sectors.
“Sector rotation strategies can potentially help investors better align their investment strategy to their market outlook and position a portfolio to get more from their core,” David Mazza, Head of ETF and Mutual Fund Research at State Street Global Advisors, said in a note.
Among the investment community, advisors largely implement four main strategies when selecting sector exposure, including tactical over/underweighting based on opportunities, core and satellite positioning based on current markets, rotation based on economic factors and diversification to diminish overconcentration to single stocks.
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State Street has found that investment professionals are not always using a standard blueprint. For instance, one surveyed registered investment advisor held 5% of assets under management in sectors and leaned toward those thought to be undervalued while another allocated a maximum of 25% to sectors and targeted opportunities validated by fund ratings and market conditions.
Alternatively, the SPDR SSGA Global Allocation ETF’s sector allocation strategy is based on valuation, sentiment, momentum and macro-indicators.
“Building on a small set of common themes, advisors and strategists have seized on sector and industry ETFs as valuable tools for potentially capturing the opportunities that exist within the market,” Mazza added. “Sector and industry ETFs provide the ability to gain granularity in the equity markets, and they can be used to help diversify a core while improving the potential for alpha.”
For instance, GAL’s portfolio currently overweights exposure to the industrial, consumer staples, technology and consumer discretionary sectors, through the Industrial Select Sector SPDR (XLI) , Consumer Staples Select SPDR (XLP) , Technology Select Sector SPDR (XLK) and Consumer Discretionary Select Sector SPDR (XLY) .
For more information on active funds, visit our actively managed ETFs category.