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Sector Effects in the S&P 500® What’s the role of S&P 500 sectors in risk, pricing, and active returns?
BY Tim Edwards, Ph.D

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.

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