Sector investing with a question mark icon

When you buy a pie, you get one flavor. It might be apple or blueberry or chocolate, depending on your tastes, but it’s one pie, one flavor. Buying securities on the stock market is different: You get more choices to mix and match, based on your investing tastes.

If you’re craving variety for your portfolio, sector investing might satisfy your need for diversification.

What is sector investing?

Sector investing allows you to target different segments of the stock market.

The stock market is split into 11 distinct sectors that represent publicly traded companies and their respective industries:

  • Information technology
  • Health care
  • Financials
  • Consumer discretionary (companies that produce non-essential items like appliances, fashion, cars)
  • Communication services
  • Industrials (companies that make or sell machinery, supplies or equipment for manufacturing and construction)
  • Consumer staples
  • Energy
  • Utilities
  • Real estate
  • Materials

Why invest in sectors?

Using sectors as a guide to invest in the stock market may help you achieve multiple financial goals, starting with diversification.

A diversified portfolio could help to maximize return potential while also creating a balanced approach to risk. If stock market volatility increases, certain sectors may be more insulated from negative impacts than others. Those investments might help to mitigate losses from sectors currently susceptible to volatility.

Investing with sectors as a guide may make it easier to understand how different trends affect various parts of the market. You can pick and choose which sectors you want to invest in based on what’s happening with the market at any given time.

Ally Invest gives you the opportunity to invest the way you want. Self-Directed Trading lets you select stocks and exchange-traded funds (ETFs) from all 11 stock market sectors for your portfolio.

Sector Investing Strategies

Sector investing strategies typically revolve around two goals: achieving growth and managing risk.

Common strategies include:

  • targeting a single sector
  • following a sector rotation
  • using a thematic approach

Single Sector Investing

You may consider overweighting your portfolio to focus on one sector that best aligns with your goals. This is also called “tilting,” since homing in on a single sector usually means decreasing your exposure to other sectors.

Sector Rotation

This strategy involves changing up your asset allocation to follow the business cycle. Specifically, this means alternating between cyclical and non-cyclical stocks as the business cycle moves from early to mid to late to recession stage and back again.

Thematic Approach

You may also invest in sectors that follow a specific theme. Say you’re interested in the information technology sector, for example. You might choose to invest in companies involved in artificial intelligence (AI) research and development. The goal of thematic sector investing is to capitalize on current trends that have the potential to stick around for the long term.

How to Potentially Manage Risks

Some stock market sectors are naturally more volatile than others. For instance, financials, technology and commodities could all see wide pricing swings when market uncertainty takes hold. Different sectors also react differently to changes in the economic landscape, with some being more sensitive than others to changes in the business cycle.

For example, if the economy looks like it’s headed toward a recession, moving from growth stocks to defensive sector stocks may make sense, depending on your portfolio. Defensive or non-cyclical sectors include utilities, consumer staples and health care. These sectors represent industries and companies that are more immune to volatility, as you still need to spend money on items that meet your basic needs.

As the economy moves out of a recession, the consumer discretionary sector may begin to look more attractive to investors as people once again spend on entertainment, travel and other nonessentials — stocks that tend to perform better when the economy is going strong.

Some sectors may also be more desirable for managing the risks associated with rising inflation. For instance, you may be interested in energy or real estate sectors when inflation is rising, as both might act as a hedge against higher prices. That’s because if inflation triggers higher rent prices, real estate investments (such as REITs) may generate better returns.

What are good sectors to invest in?

Choosing the right stock sectors to invest in depends on your goals, risk tolerance and time horizon for investing. What constitutes a “good” sector for you could also depend on the current economic trends.

For example, AI, cannabis and cryptocurrency represent some of the biggest influences shaping the markets right now. These are not sectors in themselves, but you can find companies representing them within the tech, health care and financial sectors respectively. As demand for AI technology, cannabis stocks and digital currency grows, these sectors could be poised for major growth — however, they are also subject to volatility, so it’s always a matter of weighing what’s best for you.

Select Your Sectors

Sector investing may help to improve diversification, while managing risk and enhancing returns. Getting started is easier than you might think, and it begins with choosing the right platform to invest.

Explore your sector investing opportunities with Ally Invest.

Check out Our Self-Directed Trading Account