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?
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.
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.
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 : )