Investing in sub-sectors in 2013 - Analysis underway

by Wayne Ferbert on December 31st, 2012

If you recall the sector rotation analysis we did earlier this month, we liked the Financials and Energy sectors because they look the most under-valued compared to the other sectors.

Of the 9 largest sectors in the S&P 500, there are many large ETFs that you can invest in to create an overweight sector position. The nine are Technology, Financials, Energy, Utilities, Consumer Discretionary, Consumer Staples, Materials, HealthCare, and Industrials.
However, there are other sub-sectors within these primary sectors that you can invest in using large ETFs. A sub-sector is really just an industry that is considered part of a larger sector.
Look at the Technology sector. It is made up of Software, Networking equipment, semi-conductors, and Internet services, just to name a few. You might have a specific investment hypothesis about one of these industries. In fact, typically, it is easier to form a strong opinion about an industry than a full sector – because the factors that affect the industry are more narrowed in scope. The full sector has many industries and is more diverse in its holdings which makes it less volatile than an industry or sub-sector.
So, we will kick off 2013 looking at some sub-sector ETFs using the same valuation analysis we used when we looked at the S&P 500 sector ETFs. We will see if we can identify any pockets of hidden value in these sub-sectors that might make them a strong investment candidate for some of your discretionary investments in 2013.
The sub-sectors we will examine will all have ETFs with at least $200 million in AUM in the ETF. We only want investable sub-sectors. The full list we will examine this month is:
  • Real Estate
  • Agriculture
  • Mining
  • Home Builders
  • Bio-technology
  • Banks
  • Oil services companies
  • Water Resources
  • Oil & Gas Exploration
  • Retail
  • Internet Companies
  • Telecom
  • Pharmaceuticals
  • Semi-conductors
  • Medical devices
  • Timber
Starting on Wednesday, we will look at Real Estate, Agriculture, and Mining companies to see if we can find any value opportunities.

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