From time to time, investors should consider whether they have allocated the ‘right’ amount of their equity funds across sectors. Data on market capitalisations are shown in the second last column of the following table for each of the 11 major sectors of the ASX 200. That is, say, the value of stocks in the energy sector is 5.5% of the value of the whole ASX 200. ‘Index huggers’ - who want behaviour in their investments to as closely as possible match that of the index – should try to match these market capitalisation weights.
Depending on which stocks the investor chooses to represent each sector, the investor’s fund will evolve away from these index weights with market movements, and rebalancing from time to time might be desirable. Of course, strict adherence to such rebalancing means that good sectors are being penalised by selling off outperforming sectors to prop up the underperformers. Some latitude in following sector weights is, therefore, highly desirable.