Sector funds can be a useful way to fine-tune a portfolio or track a theme, but check what the index holds
Cris Sholto Heaton Investment columnist
The MoneyWeek exchange-traded fund (ETF) portfolio holds most of its equity allocation in broad funds: US, Europe, Japan and emerging markets. However, there are many other ways to slice up markets, such as sector, size, factor (stocks with specific characteristics such as high yields or low price/earning ratios), thematic and more.
Given that many companies – especially larger ones – depend on the state of the global economy more than the country where they have their main listing, this may seem like a more sophisticated approach. So why not ignore geography and build a portfolio using sector trackers to reflect which sectors offer the best value?
Telcos and tech
Before considering this, it’s important to note that not all sector funds offer exactly what an investor would expect from their names.
Take the MSCI World Communications Services index, for example, which sounds like it will be mostly telephone companies. Historically, that was largely the case. However, in 2018, changes to the global industry classification standard (GICS) – the industry categories used for companies – put Alphabet, Meta Platforms, Netflix and Disney in the sector. As a result, Alphabet and Meta now account for more than 50% of the index. A tracker for this is not going to behave like a collection of telecommunications stocks (which might be a relief , given the poor long-term returns of many telcos).
Or take consumer discretionary, a category that seems as if it should be about fashion and leisure. Yet about 20% of the index is automakers, which are definitely a big, discretionary purchase but have very different dynamics to McDonald’s. Another 20% in is Amazon, which is key part of the consumer economy, but is more about logistics and data centres than making and selling goods.
Out of the giant tech megacaps, only Apple and Microsoft fall into the MSCI World
