[This article originally appeared in our August issue of ETF Report.]
In an investment universe that's becoming increasingly worldly, it's no surprise that investing in sectors globally is coming increasingly into focus.
In some ways, going international is a logical stepping stone from the huge franchises of domestic sector funds that have clearly captured the imaginations of U.S. investors. And yet globally focused sector investing—"global" means everything, as in U.S., non-U.S. and even emerging market companies, while "international" means securities excluding the U.S.—while growing in popularity, isn't exactly going gangbusters. One reason is because home-country bias among U.S. investors continues, with ETF assets in domestic strategies still about three times as plentiful as those in international.
But even among those investors who have shed home-country bias and are pushing systematically into the international realm to diversify, there remains a tendency to stick to approaches of previous generations. That has slowed the adoption of international sector investing.
All of this isn't to say that global sector investing is a nonstarter. But it may take a few years for all the stars to align for it to become just another approach among several.
"We don't always invest in sectors," said Richard Bernstein, chief executive officer and chief investment officer of Richard Bernstein & Co. "What we have to do is try to figure out where we're going to get the biggest bang for our buck. Sometimes that will be sectors; sometimes that will be countries; sometimes it may be dividend yield; sometimes it might be quality; sometimes it might be domestic versus foreign."
Good Reasons To Focus On Sectors
Those who do invest internationally using sectors as an organizing principle swear by it, arguing it's an effective way to more carefully manage risks in a world that has become increasingly globalized.
"As the world has flattened, you have to consider what's going on around the world with different companies," Corey Hoffstein, chief investment officer and co-founder of Boston-based Newfound Research, said, referring to firms like Apple and Samsung or Exxon Mobil and Royal Dutch Shell, which are global competitors in the same global industries.
"So if you want to take the market temperature of market risk for a given sector, you really can't just look locally anymore. You have to say: I'm going to look at all these companies everywhere," said Hoffstein, whose firm uses iShares' family of global sector funds in a number of its portfolios. To be clear, "global" means these funds include firms from all over the world, including in the emerging markets.
For Hoffstein and Newfound, investing in sectors is about fine-tuning risks in the name of enhancing returns—particularly avoiding problems that could lead to big portfolio losses.
"We believe a lot of risks and bubbles in the market tend to manifest in an industry or a sector," Hoffstein said. "It's a tech bubble; it's a housing bubble; it's a financial crisis. These things have global effects, but they tend to start in a certain sector, and other sectors tend to be safe. Investing in global sectors gives us the ability to finely tune our portfolio to where we see there's safety in the market."