What is the FSI Sector Allocation?

The S&P 500 index is comprised of 11 Sectors (GICS Level-1). An investor that buys an S&P 500 ETF (ex. SPY) or an S&P index fund is essentially gaining exposure to all 11 sectors according to each sector’s respective weighting in the index.

We aim to create a systematic approach to sector allocation that our members can easily grasp and use to outperform the market in the long run.

Systematic Approach

– Although our Sector Allocation model reflects our expectations for the future stock market, we have designed this model as a systematic approach. This will reduce the influence of personal intuition or judgment on the results. Importantly, this offers consistency, making it easier for our members to distinguish the differences between this month's allocations and those of previous months. Specifically, they can clearly discern what changes have led to our adjustments in sector weighting.

Understandability

We strive for simplicity and transparency. By establishing clear steps and guidelines, anyone involved can easily comprehend how weights are determined and why certain decisions are made. We have refrained from introducing new jargon or overly complex systems. Our objective is to make all aspects understandable, from the qualitative logic behind sector-weighting decisions to the quantitative process of producing the final sector weights.

Versatility

We aim to cover both short-term and long-term strategies, as well as both active and passive approaches, with our new model. While our macro team predominantly focuses on long-term strategies, we do not want to neglect short-term dynamics. Our new sector allocation model, akin to our acclaimed Granny Shot stock list, merges both our long-term sector perspectives with short-term market technical dynamics. In its design, we also took into account the preferences of some members who require their sector allocations to vary only within certain limitations from the standard sector weightings. The final model therefore encompasses passive index tracking and our subjective sector strategies. In the future, we hope to make the ratio between active and passive approaches adjustable, allowing members to input their desired ratios to produce personalized sector weighting recommendations.

Methodology behind the FSI Sector Allocation

The new sector allocation model is comprised of two parts:

1. Sector ETF Allocation

  • Passive - 50% of the 85% sector ETF allocation replicates the current sector distribution of the S&P 500 index.
  • Strategic - 35% of the 85% sector ETF allocation is determined by the sector ratings of Fundstrat’s Head of Research, Tom Lee, and the sector technical rating of Fundstrat’s Head of Technical Strategy, Mark Newton.
  • Short-term Momentum – We increase the weighting of the top 3 sectors with the strongest short-term momentum. Conversely, we reduce the weighting of the 3 sectors with the weakest short-term momentum.
  • Price Momentum
  • Valuation

2. Tactical ETF Allocation

Tactical ETF Allocation: 15% of sector allocation model. This portion is new to the model.

  • During each monthly update, we select 5 individual ETFs from a universe of 65 ETFs.
  • The selection process resembles our “Super Grannies” method and consists of four primary elements:
    • ETF Rank
    • Tactical Rank
    • Price Trend
    • Technical View from Fundstrat’s Head of Technical Strategy, Mark Newton.
Outperform

An Outperform signal for a sector indicates that we advise an OVERWEIGHT benchmark weighting.

Neutral

A Neutral signal for a sector indicates that we advise an EQUAL benchmark weighting.

Underperform

An Underperform signal for a sector indicates that we advise a ZERO benchmark weighting.

We understand that some clients are only interested in the Sector ETF allocation. As such, we’ve also included a version of an allocation consisting solely of Sector ETFs.

Learn more about the industries and stocks that comprise each Sector

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