Hot sectors? Just index it

Summary: Sector investing no longer has to mean stock picking. With the rise of sectoral ETFs, investors can take focused exposure to industries through low-cost, rules-based indices, while avoiding many of the mistakes that hurt active sector funds. For years, passive investing was largely synonymous with broad markets. Investors who chose index funds or ETFs accepted a simple trade-off: give up the possibility of outperformance in exchange for low costs, transparency and consistency. That trade-off made most sense in large-cap equities where active managers struggled to beat benchmarks with any reliability. But when it came to sectors, the rules were different. Sector investing was considered a playground for stock-pickers. Banking, Pharma, Technology or Energy exposure was supposed to be built by identifying the right companies at the right time. Passive investing stopped at the market-cap boundary. That distinction is now fading. The steady rise of sectoral index funds and ETFs has quietly altered how investors can access sector exposure. What was once an active-only domain can increasingly be navigated through rules-based, low-cost instruments. In the process, the need for active stock selection within sectors has reduced more than many investors realise. What sectoral ETFs get right Sector investing has always carried two layers of risk. The first is choosing the right sector at the right time. The second is choosing the right stocks within that sector. Active funds attempt to manage both. Sectoral ETFs strip away the second layer. By construction, they hold the leading companies in a sector, weighted by market capitalisation or another transparent rule. There is no discretion involved, no style drift and no dependence on a fund manager’s judgement. This matters because historically, a large part of sector fund underperformance came not from getting the sector wrong, but from stock selection errors within the sector. Concentrated bets, timing mistakes and excessive churn often hurt outcomes even when the broad sector performed well. For instance, Nifty PSU Bank ETF delivered annual returns of 36 per cent over th

This article was originally published on February 01, 2026.