Sometimes, the sector composition of an equity portfolio is of primary importance. At other times, single-stock risks are more prominent. In this paper, we shall:
• Assess the relative importance of sectors in determining the performance of the S&P 500 and its constituents;
• Compare the potential of active strategies based on sectors to those based on single stocks;
• Discuss the role that sector-based products can play in generating active returns; and
• Identify periods when sector selection was particularly important.
This perspective is particularly timely; Exhibit 1 illustrates the increasing strength of sector-level effects in the S&P 500 over the past five years.