As consumers we constantlyseek to buy the things we need at the lowest possibleprice. Unfortunately, many investorsdon’t behave the same way when it comes to their investments. Some investorsare frequently investing into assetclasses that have already gone up and they frequently sell their investments after they have gone down. Investors might fare betterif they shopped for the cheapest stocks and sectors when makinginvestment decisions. One of the strategies that I use inside of some of ourmanaged accounts is a smartbeta strategy designedto own only the cheapestsectors of the stock market.
Within the S&P 500 there are 10 economicsectors that includehealthcare, telecommunication, Info Technology, energy, consumer staples, consumer discretionary, utilities materials, industrial and financials. There are investment options that implement this strategy and essentially seek to identify the five cheapest sectorsbased on the ratio of the share price relative to the earningsper share. Sectors that offer investors the opportunity tobuy the most earnings for the lowestprice are considered the cheapest sectors. Then the strategyeliminates the sector with the worst momentum and allocates the fund assetsto the four remaining sectors. Eliminating a sector that has been performing poorly is designed to help avoid a so-called “value trap” where an investment appears undervalued yet is continuing to fall in price.
Periodically, this strategy rebalances according to this formula. According to Morningstar, over the last four years this strategy had not only significantly outperformed the S&P 500 but has had much lower volatility as well. As always,it is recommended to consultwith your financial advisor to make sure that any strategy that you are considering is appropriate for your risk tolerance and objectives.
Keith Singer is securities licensed through Investacorp, Inc. A Registered Broker/Dealer, Member FINRA, SIPC. Advisory Services offered through Singer Wealth Advisors, Inc., a registered investment advisory firm. Singer Wealth Advisors, Inc. is not affiliated with Investacorp, Inc.
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