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3 Good Stock Funds Provide Pronounced Sector Preferences

In the current benign volatility environment, it is useful to look at sector concentration.

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It’s no secret that market volatility has been trending downward significantly. In fact, as of June 30, 2017, the 12-month standard deviation of the S&P 500 reached 6.06%. You have to go back to 2007 to find a level lower than that. Reasons to explain this phenomenon abound, ranging from continuing quantitative easing across the globe to significant reduction in political risk after Brexit, President Donald Trump’s election last year, and the recent failure of populist candidates to access the French presidency.

One side effect of such a benign volatility environment is that it can create a false sense of security among investors. Correlation across stocks and sectors tends to rise in this scenario, which makes past measures of volatility less useful at identifying some riskier options. It might then be judicious in such times to look at some old-fashioned, portfolio-based measures of risk such as sector concentration.

Thomas Lancereau does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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