As director of ETF capital markets, I’m often asked what are the most important market trends for ETFs. It’s certainly been a wild year, but without a doubt, I would say sector dispersion is creating some of the biggest opportunities and risks for ETF investors.
Leaders and laggards
On the John Hancock ETF desk, during the COVID-19 pandemic we’ve seen some real sector leadership emerge from areas such as technology and communication services, as well as some parts of the healthcare sector as investors eagerly await a vaccine. (I recently discussed sector ETF dispersion and what it means for investors in a recent episode of our Portfolio Intelligence podcast.)
Yet on the flip side, we’re seeing some extreme laggards. In fact, we may not have seen anything like this since banking stocks led the way lower during the global financial crisis. Entire sectors aren’t participating in the unexpected rally since the March 2020 lows—the energy sector has been left for dead. Meanwhile, lower interest rates in response to U.S. Federal Reserve easing have made it tough for the financials sector lately.
Sector ETFs and innovation
A lot of the discussions we've been having with clients now focus on sector dispersion and potentially incorporating it into ETF strategies.
The most basic approaches focus on the major 11 sectors as defined in the Global Industry Classification Standard, which are information technology, healthcare, financials, consumer discretionary, communication services, industrials, consumer staples, energy, utilities, real estate, and materials. Investors can use these broader sector ETFs in sector rotation strategies, or to emphasize or avoid particular sectors.
However, innovation from ETF providers has allowed investors to get much more granular with strategies that focus on narrower industries and thematic investing. For example, investors can target green energy, artificial intelligence, and other themes with targeted ETFs.
Multifactor sector ETFs
At John Hancock, we offer a lineup of sector funds that incorporates multifactor investing. This approach considers factors such as size, value, and profitability that academic research has shown to historically outperform over longer time periods.
We believe multifactor sector ETFs may appeal to investors who have long-term favorable views on particular sectors such as technology and healthcare due to secular trends.
Sector ETFs: precision tools
The extreme sector dispersion we’re seeing today is the latest example of how investors are using ETFs to get targeted and efficient exposure to specific industries and investing themes. However, it’s important to remember that sector investing has risks, particularly in volatile markets. ETFs are letting individual investors participate in strategies once reserved for institutional investors, but as always make sure you know exactly what you own.