ETF.com: Is there a wrong way to implement a sector rotation strategy? How can you get it wrong?
Stein: There are wrong outcomes. There are many different ways of adjusting your sector exposure, but I’d think that if whatever you're doing constantly put you in the underperforming sector over time, you might want to look at something else.
But the risk of getting it wrong in sector selection might not be as harmful as in cash equity. The fact that there's a regression to the mean, if you will, or that a rising tide lifts all ships, it would seem to be less potentially harmful to move from a sector to another if you’re in a long-term rising stock environment than it would be to simply be in the wrong individual stocks. The risk of harming a portfolio by not being in the right individual stocks would seem higher.
ETF.com: Do you recommend sector investing globally or do you focus exclusively on the U. S.?
Stein: We have a product where we look globally at risk assets. It’s a sleeve in the portfolio, and we increase and decrease exposure based on analysis of global economies, some momentum and on how they relate to the U.S. economy. But there is a correlation between global risk assets. Maybe not day for day, or quarter for quarter, and there are some outliers, of course, for geopolitical events, but there’s a correlation between stock markets around the globe and the U.S.
ETF.com: Do you like any specific sector ETFs? Are you using sector SPDRs, or are you implementing sector strategies with smart beta funds?
Stein: We stay away from smart beta. That's what we ourselves do—we’re the smart-beta element of asset management, if you will. Unless it’s doing something we just don't look at all.
For example, we use First Trust ETFs in some things because they weight the portfolios in a way we just don't look at. But for us, we really want the ETF to perform when our fundamental analysis is performing. We also look at cost, to a degree, but it’s not a first consideration.
We need the ETF to be liquid so we can trade it, and we want to make sure it’s weighted in a way that we understand. The visibility of how the ETF is constructed is also very important.
ETF.com: REITs became its own sector this year under GICS. Is there space or even a need for other sectors to split? Could technology, for instance, be more finely tuned now that every business, in one way or another, is increasingly techy?
Stein: I think it’s going to happen more. REITs were an obvious low-hanging fruit. I think a lot of people already were separating REITs from financials. We were doing components of that when we were looking at dividend and/or REITs and/or financials.
But that’s a great point about technology: As technology becomes a very important part of every business, when does it become the business?
I’ve always said that every business ultimately becomes a marketing and distribution business. You make your doughnuts, you work on how good they taste, and they finally taste good enough where people are buying them. Now, it’s all about selling and marketing.
I'm not sure where the crossover is from a technology company. Maybe we need to look at what the core product is, but definition will be crucial to deciding what you're looking for in your exposure.
Contact Cinthia Murphy at [email protected]