Hello, I've been thinking about sectors lately. I would expect stocks within a sector to usually be more strongly correlated to each other than the rest of the market (and sectors are easier to work with quantitatively than other correlation-inducing factors such as supply chain, geopolitical risk, etc.). Wondering if there's some exploitable alpha in exploring sector dynamics.
I was wondering if anybody is doing anything with sectors within pipeline. I'm having a hard time figuring out if it makes sense or is possible to do any sort of grouping or ranking per sector, as opposed to relying entirely on the optimizer to brute force sector neutrality. Would you do this within a single pipeline or would you duplicate one pipeline for each sector? Or is it better to do these calculations entirely outside of pipeline?
For example, fundamental factors are likely going to vary wildly between sectors. For example, a "value" factor may broadly rank utilities highly and technology stocks poorly, while what you might really want to do is compare value within each sector. While I assume the optimizer will fudge the weights for you so that you do get this desired outcome -- I don't know, does it? or does it emphasize instead the sectors that are balanced and leave the unbalanced sectors out of the portfolio? At any rate, I imagine there are some scenarios where this muddies things. Seems there are situations where having control over both net and gross sector weight would be useful.
Or what about if you wanted to rank stocks based on whether they are underperforming or outperforming their sector ETF for some sort of sector-based mean reversion algorithm? I realize you can do this outside of pipeline, but is it possible to do within pipeline?
What do people do about Communication Services? It's obviously so new, you can't backtest very far. If I try to use symbol('XLC')
in pipeline outside of its lifetime it throws up its hands and gives up. (XLRE
isn't very old either.) For example, if I wish to use pipeline to calculate a stock's beta to its sector, this seems like it's going to cause some problems. Any ideas?
This post is a bit of a fishing expedition. I've been thinking a lot about how to approach sectors, but the more I think about it the more questions it raises.