It May Be Time To Ditch Sector Investing And Go Thematic

It May Be Time To Ditch Sector Investing And Go Thematic
Theodora Lee Joseph, CFA

5 months ago2 mins

If your investing life has spanned more than 15 years, then you’re probably well aware that the recent run of near-zero interest rates was an anomaly. And you’re probably aware that there’s a good chance that rates are going to continue to be a lot higher than that, and this naturally has consequences for how you invest. For one, you’ll need to place more emphasis on portfolio resilience – that is, your investments’ ability to weather market cycles and volatility.

Investing in sectors might seem like a good way to ride out business cycles: you could invest in cyclical industries like industrials and financials when the economy is recovering, and move into defensive sectors like healthcare and telecom when you expect a downturn. But if you’re not great at timing cycles, and want more of a “set it and forget it” approach, you might be better off investing in themes instead. As the chart shows, the average sector correlation (dark brown bar) to the US composite leading indicator, which is a fancy signal for when the business cycle is turning, is much higher than the average theme correlation (dark blue bar). In other words, when you invest thematically, your returns are far less dependent on how well you time the economic cycle. That’s because thematic investing is focused on the longer-term and the structural drivers of the market, and less driven by short-term market fluctuations.

So if you are business-cycle agnostic and prefer simply to let your portfolio run on its own, you could consider investing in low-correlation themes like infrastructure, robotics, or wellness. Their success is less likely to be impacted by shorter-term growth and inflation dynamics, given their long-term prospects and support from governments. For starters, you can consider the iShares Automation & Robotics UCITS ETF (ticker: RBOT; expense ratio: 0.4%), iShares Smart City Infrastructure UCITS ETF (CITY; 0.4%), or the Global X Health & Wellness ETF (BFIT; 0.5%).



All the daily investing news and insights you need in one subscription.

Learn More

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG