Ask Colin

I trade small stocks. What relevance are the S&P ASX200 sector indices?

There are many issues here:

As you commented when sending your question, these sector indices were created for the institutional market. Only the very broad second level sector indices have been released by S&P to the "great unwashed" private investors. Institutional investors have access to the far more detailed sector indices at levels three and four of the S&P structure, which are way beyond the means of private investors to pay for.

The very broad nature of the second level sectors means that they are not as useful as the old ASX sector indices because their scope is so wide. The worst example is probably the Materials index. If there is too wide a scope in a sector index, it is hard to know which industry group it is actually reflecting.

However, where a broad sector index is fairly "pure", it can give a good idea of the market's sentiment towards that industry.

Also, even the broad sector indexes can be used as a starting point for top-down analysis - the most common approach by institutions and which S&P evidently do not want us to "try yourself at home". It can help you spot the hot and cold sectors and you will then have a starting point to dig further.

So, the answer is that the S&P sector indexes, as available to us are only a little assistance and only as a rough starting point. It would be better if we had access to the third and fourth level sector data.

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