According to Haria, passive products allow investors to express a view on sectors without taking on single-stock risk — a common challenge when sector leadership shifts quickly.
Reducing stock-specific risk
Sector calls are often driven by changes in interest rates, earnings momentum, regulation, commodity cycles or credit conditions. However, even if the sector outlook plays out, identifying the right stock within that space can be difficult.
“Getting the sector right but the stock wrong is common,” Haria noted, adding that passive vehicles track a broader index of sector constituents, thereby spreading risk and reducing concentration.
Such products also typically offer rule-based construction, transparency and relatively lower costs.
Used judiciously, he said, they can complement core portfolios through measured tactical tilts.
Thematic investing and market cycles
Haria said thematic investing remains relevant as economic growth is rarely uniform across sectors. Leadership tends to shift depending on policy support, earnings visibility, capital flows and innovation cycles.
Broader benchmark indices may not always capture emerging sectoral shifts early.
At the same time, he cautioned that thematic strategies can be volatile. Timing, diversification and disciplined allocation are key, particularly when themes run ahead of fundamentals or face sharp drawdowns.
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Passive products tracking sectoral or thematic indices may offer a more diversified route to participate in such trends while limiting stock-specific exposure, he said.
Long-term sectoral drivers
On long-term prospects, Haria pointed to banking, energy, consumer and technology sectors, linking their outlook to structural economic drivers.
Banking may benefit from credit expansion and financialisation of savings. Energy remains central to industrial activity and transition trends. Consumer businesses reflect rising incomes and urbanisation, while technology continues to be driven by digital adoption and productivity gains across industries.
Though these sectors may experience shorter-term cycles, their long-term trajectory is tied to broader economic growth, he said.
Macro complexity and investor behaviour
Haria described the relationship between sector returns and macroeconomic variables as complex. Interest rates, inflation, currency movements, commodities and liquidity conditions interact, often with varying lags. Markets also price in expectations ahead of visible macro improvement.
As a result, sectors can outperform before macro indicators turn positive — and underperform even when data appears strong if optimism is already priced in.
He also highlighted behavioural biases. Performance chasing during rallies can lead to late entries at stretched valuations, while fear-driven exits during drawdowns can result in selling near cyclical bottoms.
To address this, Haria suggested predefined allocation bands, staggered deployment, systematic rebalancing and diversified exposure through passive vehicles.
A structured passive framework
According to Haria, sectoral allocations are best positioned as a satellite component of a broader diversified portfolio.
A disciplined approach would include selecting appropriate sectoral or thematic ETFs, diversifying across multiple ideas, adjusting exposure as macro conditions evolve, and being mindful of tax implications and sharp sector cycles.
He added that multi-sector passive fund-of-funds structures can combine various sector and thematic ETFs, actively adjust weights within a passive framework and rebalance internally, potentially reducing the tax impact of frequent switching at the investor level.
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