Definition
Sector rotation is a strategy of moving investments between industry sectors to capitalize on different phases of the economic cycle. Different sectors lead at different points: consumer discretionary and technology early in expansions, industrials and materials mid-cycle, energy and staples late-cycle, and utilities and healthcare during recessions. The strategy requires correctly anticipating economic conditions. While potentially rewarding, timing sector rotations is challenging, and the strategy involves higher turnover and transaction costs.
Example
Anticipating economic recovery, an investor rotates from defensive sectors (utilities, healthcare) to cyclical sectors (consumer discretionary, industrials). As the economy matures, they gradually shift toward energy and materials before returning to defensives.
FAQ
What is Sector Rotation?
Shifting portfolio allocations between sectors based on economic cycles.
Why is Sector Rotation important?
Sector Rotation helps investors evaluate investment strategies and make more informed decisions.