Why Sector Diversification Is Important

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Allocating assets among various sectors is one way to implement the diversification strategy. This is because the sector that earns the best returns in one year might end up turning the worst the following year. For example, the below chart shows the annual sector returns of the S&P 500 index from 2013 to 2022. We can easily see that not one sector is the consistent best performer year after year.

Energy for instance had the best returns in 2016 but in 2017 it was the second worst performer. Similarly the sector plunged heavily in 2020 when the Covid-19 pandemic hit and had a loss of 34%. The following year however energy rebounded sharply and was the best sector in the S&P 500 with an astonishing return of 54%. Energy again surprised many investors in 2022 when it earned the highest sector returns of 66%. The sector is not having a great run so far this year. It is the second worst performer with a loss of 5.5% after utilities.

Annual Sector Returns of the S&P 500 from 2013 to 2022:

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Source: Thrivent

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • SPDR Consumer Discretionary Select Sector SPDR Fund (XLY)
  • SPDR Consumer Staples Select Sector SPDR Fund (XLP)
  • SPDR Energy Select Sector SPDR Fund (XLE)
  • SPDR Financials Select Sector SPDR Fund (XLF)

Disclosure: No positions

On the Performance of Auto-Parts Retailers Stocks

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One way to profit from the growth of the automotive sector is to invest in auto parts companies. This includes auto parts markets and retailers. Auto makers are not a great investment especially for the long-term due to many issues including legacy obligations and other factors. Auto parts makers and retailers benefit benefit during good and bad times. During normal periods, consumers depend on them for regular maintenance and during recessions people tend to hold on to their existing vehicles longer which inevitably requires parts maintenance and replacement.

The biggest of the three auto-parts retailers in terms of market capitalization is O’Reilly Automotive Inc (ORLY) which has a market cap of over $56 billion based on Friday close. The next top firms are Autozone Inc (AZO) and Advance Auto Parts, Inc.(AAP). AAP is the smallest with a market cap of just under $4 billion.

O’Reily stock is the top performer so far this year with a return of over 10%. Autozone is flat. But Advance Auto Parts has plunged by nearly 58% as shown in the chart below:

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Source: Google Finance

The following chart shows the 5-year returns:

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Source: Google Finance

In the past 5 years also AAP has been the worst performer. Autozone beat Advance Auto with a return of 220%.

AAP had poor earnings in the first quarter and also slashed its dividend. Consequently its stock had the largest single-day decline ever in May. The company missed its second quarter earnings miss and lowered the forward guidance. With major management changes announced including the replacement of the CEO, it will be a while before AAP recovers. Given its past performance it will be a hard slog. From an investment perspective it is better to avoid AAP.

Disclosure: No positions

Why Tactical Asset Allocation is a Not a Smart Idea: Chart

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One of the key strategies for success with investing is the simple task of diversification. I have written many times in this blog that diversification is the easiest way to reduce risk and improve returns. Diversification over various asset classes is one way to implement diversification in a portfolio. The following chart shows the importance of diversification using returns from the UK market as published by Vanguard:

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Source: Vanguard UK

The Top 10 Restaurants by U.S. Revenue 2022

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The Subway fast food chain is to be sold to Roark Capital for $9.6 billion according to a recent article in The Wall Street Journal. Subway is the eighth largest chain the US based on revenue in the US market in 2022.

The top restaurant chain in terms of US revenue is McDonald’s (MCD). While Starbucks (SBUX) at number two is not surprising, Chick-fil-A taking the third spot is indeed surprising.

All the top 10 companies listed above are established players with billions in revenue. It remains to be seen if any of the smaller startup chains such as Sweetgreen (SG) and others can join this elite group.

Source: Subway Sandwich Chain Nears Sale, WSJ

Disclosure: No positions

Homicide Rate in South America: Chart

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In an earlier post we looked at the homicide rate in the US and Europe. In this post, let’s take a quick look at the homicide rate in South America. Globally countries in the continent are not known for low homicides. Homicides rates in South America are very high relative to the rates in Europe and the USA.

The highest rates are in Venezuela, Colombia and Brazil. The lowest homicide rate is in Chile followed by Argentina.

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Source: Landgeist