14-Year Study Backs Sector Investing

By Ronald Delegge

August 31, 2015 at 08:00 PM

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Location isn't everything and the numbers prove it.

A newly released 14-year study by Morningstar Investment Management found that diversifying equity exposure across industry sectors versus geographic location is a more important factor for determining earnings and dividend growth across country indexes.

The globalization of business was cited as one of the main reasons for this phenomenon. As more companies operate globally, where they're headquartered becomes less significant as a growth factor.

Industry sector funds are among the largest ETF categories by both quantity of funds offered and assets under management.

"The dominance of the industry factors in explaining differences in earnings and dividend growth is further demonstrated by the fact that the industry factors explain 56.2% and 49.2% of the variance in dividend and earnings growth, respectively, as measured by R-squared, suggesting that [a major cause of] differences in fundamental growth across countries stems from differences in their industry composition as opposed to their stock listing location by region," reports Morningstar.

These findings examined global equity returns from 2000 to 2014 and may upend the way both advisors and investors go about obtaining portfolio diversification.

Traditionally, stock investors have diversified by allocating their money away from their local stock market into international markets. But since the benefits of region diversification are limited according to the study, emphasizing sector diversification, particularly in developed markets, is a must.

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