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I know economic sectors such as industries represented by SIC codes or GiCS codes are often covered in depth by analysts and some specialize at the industry level rather than stock level. At least this is what I heard. My question is: what kind of investment strategies are typically employed when investing at the industry level? For example, with single stocks, one can build minimum variance portfolios or max diversification portfolios etc. How do index providers and investment companies integrate industries in their trading strategies other than offering for example ETF to track some indices?

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On a high level you can apply several binary approaches to sectors, such as defensive vs. cyclical, value vs. growth, over-bought vs. oversold. These could be macro driven. E.g. energy, consumer discretionary tend to be cyclical, whereas utilities, consumer staples defensive. You position accordingly based on where you think the economy is going. Or it could be momentum or market driven. E.g. rotate out of overbought sectors into oversold sectors periodically.

Separately there's also thematic approach to sectors which is more fundamental. E.g. you like AI and thus want to overweight tech, or you think govt will tighten the capital rules and want to underweight banking, etc.

Just a couple examples.

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Sector rotation. Google it. It works. For instance energy has done well this past year because we are "heading into a downturn" or at least that is what the market thinks including me.

Also google the business cycle. Energy leads in downturns. Tech leads in upswings in the economy.

Business Cycle https://corporatefinanceinstitute.com/resources/economics/business-cycle/

Sector Rotation https://school.stockcharts.com/doku.php?id=market_analysis:sector_rotation_analysis

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Energy2

enter image description here

Take a look at these images. The descriptive picture (not the stock chart) shows you that firstly the stock market moves before the actual economy ie the stock market is forward looking. It also shows you that right before the market starts selling off and thinks a downturn is happening, energy will start to lead.

Take a look at the stock chart. One line is the S&P 500 (Spy).2022 was a down year. While for the Energy ETF (XLE) it was an up year. So this describes what I am talking about. When the market starts to dive from a business cycles perspective, at the end of an upswing in the business cycle, energy will lead. Take a look at the other sectors and where they are on that descriptive chart, and you'll see which cycle is good in which part of the cycle. Lmk if you have any questions, happy to answer : )

2009 enter image description here

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    For how simple it may sound, just knowing the appropriate lexicon is a very good starting point, hence I upvoted the answer. It is very sad to see downvotes without any attempt to give even a simple answer, hence thank you for giving me a good hint
    – user9875321__
    Aug 24 at 12:54
  • "energy leads in downturns" how so? Is it not pro-cyclical?
    – xiaomy
    Aug 24 at 22:00
  • I edited my post so I could include pictures. Take a look my friend.
    – Ryan Kephart
    Aug 26 at 20:56
  • You point to spring 2022 for an inverse relationship between stocks and energy sector, when there was a significant geopolitical event taking place. However, in the same chart it also shows how energy tracks stock market incredibly well during the pandemic. I think you will find a lot more examples of procyclicality of energy in history, for good fundamental reason.
    – xiaomy
    Aug 30 at 18:03
  • @xiaomy see my post under 2009, new picture
    – Ryan Kephart
    Aug 31 at 20:01

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