Inside ETFs: Sector-based ETFs can help jazz up returns

first_imgHigh-income men more likely to be emotional investors lightwise/123RF Upward trajectory in ETFs’ AUM expected to continue Related news Responsible investing ETFs are vital to attracting millennials Facebook LinkedIn Twitter Financial advisors can use sector-oriented ETFs to help investors take advantage of market trends and add a dash of extra exposure to industries in which they spot opportunity, attendees at the Inside ETFs conference in Hollywood, Fla., were told on Tuesday. Jade Hemeon Share this article and your comments with peers on social media There’s significant variation in the performance of individual sectors in any given year relative to broad market averages, such as the S&P 500 composite index, and picking winning sectors is one way to beat the averages by adding a little juice to broadly based core holdings. For example, in 2016, the S&P 500 composite index gained 12.5%, but the energy sector gained by 35%, financials by 30%, materials by 28% and industrials by 26% as cyclical stocks came back into fashion. The expectation that U.S. President Donald Trump will support energy and infrastructure projects added an extra boost to these categories at the end of the year. Defensive sectors did less well in 2016, and real estate was the worst performer with a 3% gain. “There was a dispersion between the top and bottom sectors,” said Kim Arthur, CEO of Main Management LLC of San Francisco, who spoke during a panel discussion on sector investing in the Trump era. “The animal spirits have started to run, and markets overall likely have more room to rise.” Sectors tend to perform well in advance of an earnings turnaround, and the “runway” can be as long as 18 months between the time stocks start to stir and earnings show strength, said Denise Chisholm, sector strategist and research analyst with Boston-based Fidelity Management and Research Co., who spoke on the same panel. Trump’s plans for deregulation and tax reform should be good for corporate profitability, and will encourage banks to lend, Chisholm says, adding that she continues to be bullish on the outlook for the financial services sector, but is not optimistic about the outlook for utilities, which tend to lag in periods of rising interest rates. A pickup in U.S. growth and employment makes the prospect of interest rate increases likely in 2017, she said. “The one thing Trump is not controlling is interest rates — at least not yet,” Arthur added. Rising interest rates and an improving economy tend to lead to improved credit quality, higher loan volumes and improving spreads for banks on their lending business. As such, another member of the panel, Kushal Gupta, senior portfolio manager at Nashville-based Tennesse Investments, also favoured financials and technology stocks. “Real estate, utilities and consumer staples won’t deliver,” he said. “These tend to be income-oriented stocks that are a proxy for bonds and don’t do well when interest rates rise.” Generally, participants were bullish on commodities stocks, and Gupta said that one way to play the trend, in addition to specific sectors, is to buy ETFs focused on the broad Canadian market. “We own Canada,” he said. “The major sectors are energy and financials, and we see it as a commodities play.” In an earlier panel, Dennis Gartman, editor and publisher of The Gartman Letter, said that although many of Trump’s strategies have yet to be determined and his frequent tweets can cause short-term reactions, the new president has made it clear he will support infrastructure and the military. “I own steel stocks, and I’m looking at shipping, railroads and the U.S. defence industry,” Gartman said. “I want to own stuff that will hurt if you drop it on your foot.” Photo copyright: lightwise/123RFlast_img

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