Leader vs. Likely Leader Portfolios: Tactical Sector Allocation

This article examines the effectiveness of sector diversification using “Leader” and “Likely Leader” portfolios. The study uses monthly adjusted closing price and market capitalization of constituent firms of the Nifty 500 Total Return Index, S&P 500 Total Return Index, and MSCI All Country World Index from January 2001 to May 2024 to construct Leader and Likely Leader portfolios, which include firms with the highest and second highest market capitalization, respectively, in each of the eleven sectors classified by the Global Industry Classification Standard (GICS). We rebalance both portfolios every month and report portfolio performance against benchmarks using standard risk-adjusted return metrics. The study finds that Leader and Likely Leader portfolios provide superior risk-adjusted returns compared to broad market capitalization–based benchmarks in emerging markets like India, developed markets like the United States, and the global market. The findings offer the opportunity to earn superior risk-adjusted returns through a sector diversification approach.