Implementing Smart Beta Strategies in a Globalized World: The Importance of Regions and Sectors

Abstract

The importance of region and sector selection has been a topic of discussion in the academic and investment communities. Some have argued that sector importance should generally be greater than region as the world’s economies have become globalized. In this study, we examined the impact of globalization on global equity investors by evaluating the importance of regions and sectors. In particular, should smart beta investors implement strategies intraregion or intrasector? Applying the globalization index equation to the global equity universe with a minimum market capitalization of $250 million, we found that most sectors are not global—that is, regional influence is larger than the sector effect. However, more sectors are becoming global. Segregating the global equity universe into 10 regions, we found that 7 of the 10 sectors are more regional in nature. The remaining 3 sectors are more global in nature. Using the cumulative sum technique, designed to detect small changes in a data series, we found that all 7 of the sectors determined to be regional have been showing a trend toward globalization since the end of the 20th century.