Sector and thematic investing is back in focus. Investors are scanning banking, IT, healthcare, FMCG, infrastructure, energy and newer themes like EVs. The appeal is simple — sector moves can be large, and themes can play out fast. But the link between sector returns and the macro environment is complex.

It is also time consuming to track. A sector return table across calendar years shows how leadership shifts. The same sector can look strong in one year and fade in another. This makes it hard for investors to stay consistent.

Themes also need clarity. A theme can cut across sectors. It can combine allied industries and stocks linked to a common idea or opportunity. This is why thematic choices can be tempting, but also why they need structure.

A second shift is behavioural. Market extremes amplify emotions. Fear and greed push investors into late entry and early exit. This is why many investors want a framework that keeps decision making steady.

Investors can access sector and thematic investing through the passive investing route. That is where a multi sector passive fund of funds approach fits. It keeps the building blocks passive. It still allows sector and thematic allocation. It also reduces the need for the investor to constantly act.

Harder than it looks

Sector performance often looks obvious in hindsight. It is rarely obvious in real time. The macro backdrop changes constantly. Sectors also respond to different triggers. The result is frequent rotation.

A simple example is the dotcom period. The Nifty IT Index saw a dramatic rise into early 2000. The period from February 1999 to February 2000 is shown as a 712 per cent surge. What followed was a sharp reversal. From April 12, 2000 to April 12, 2001, the index delivered a CAGR of minus 81.76 per cent. That is the kind of cycle that tests timing and temperament.

Healthcare offers another example. The Nifty Healthcare Index delivered a CAGR of minus 10.75 per cent from April 1, 2015 to April 1, 2018. Yet investor allocations to pharma rose sharply earlier. Investments into the pharma sector went up 57 per cent in the April 2014 to April 2015 period. The sequence is instructive. Sectors can attract attention and flows, and still go through long phases of muted returns.

Sector discipline

The larger message is about discipline. Sector discipline is the part most investors skip. It is not a view on a sector; it is a set of rules that decides how much you will own, how long you will hold and what would make you change your mind, upfront. Without such a structure, sector investing tends to drift toward reactive decision making.

A limit on any single sector, along with a separate capping on themes that move together, reduces the risk of one macro shock affecting the portfolio multiple times. Sectors can remain noisy for extended periods, and without a clearly defined holding window, activity tends to increase around short-term news flow rather than underlying fundamentals.

Before any change in exposure, a consistent checklist further helps the process. This typically includes the macro conditions a sector depends on, the earnings driver expected to support the investment case, and the evidence that would indicate the case is weakening.

Exposure changes implemented in steps, rather than in a single move, reduce the impact of immediate market moves and limit behavioural decisions.

Finally, respect diversification. Themes overlap across sectors. If two themes share the same underlying driver, concentration can build. Sector investing works best when rules, not excitement, control the wheel.

This is where passive instruments add value. ETFs offer transparent, rule-based access to sectors and themes. They track defined indices and trade on exchanges, spanning sectoral, thematic and broad market exposures.

Investing framework

A practical way to approach sector and thematic investing is to use a process. Selection matters. It starts with identifying the sector or theme ETFs to use. Moving matters next. That is about shifting exposure when the environment changes. Assignment matters too. That is deciding weights across baskets, not just picking one theme. Right time matters, because sector cycles can be sharp. Taxation matters as well. Internal switching in the portfolio does not involve taxation, unlike holding individual ETFs.

This is where a multi sector passive FoF structure becomes useful. The portfolio can hold several sector and thematic ETFs together. It can also include other domestic equity ETFs, including ones launched later. The investing style is to monitor macro cues, identify themes and sectors, pick ETFs from the passive bucket, and assign weights. The monitoring is periodic. The allocation is active within a passive building block set.

Such an approach is driven by a process that reacts to evolving conditions. This involves profit booking in segments after a strong performance. It seeks sector valuation comfort after underperformance.

For investors, the takeaway is clear. The results are better when sector or thematic investments follow a consistent approach. Passive ETFs provide the basket, while a multi-sector fund of funds provides the structure, offering a calmer, more systematic way to stay aligned with a changing macro landscape.

The author is principal — investment strategy, ICICI Prudential AMC