Investing Ideas

The case for using a sector based framework in equity portfolio construction

Sector exposure has been a major driver of stock returns and can be an effective way to seek an objective and manage portfolio risk.

By: Denise Chisholm Scott O’Reilly
Updated: 8/15/2023
Key Takeaways
  • Using a sector-based framework to build equity portfolios can help investors achieve a variety of investment objectives and manage portfolio risk.
  • Beyond company-specific factors, sector exposure has been the most influential driver of the variability in equity market returns over time, yet sector-based portfolio construction remains an underutilized strategy in the marketplace.
  • Equity sectors have a variety of attributes, including stable classification, consistent earnings drivers, high return dispersion, clear volatility patterns, and low correlations, which together can help investors generate an efficient portfolio.
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