What is 'Sector Rotation'

Sector rotation is the action of shifting investment assets from one sector of the economy to another. Sector rotation involves using the proceeds from the sale of securities related to a particular investment sector for the purchase of securities in another sector. This strategy is used as a method for capturing returns from market cycles and diversifying holdings over a specified holding period.

BREAKING DOWN 'Sector Rotation'

A sector rotation strategy may be deployed by individuals or portfolio managers. Sector rotation requires a great deal of liquidity and broad latitude for enacting investments positions. If broad trading flexibility is available then sector rotation can be a viable way to position investment portfolios to take advantage of market cycles and trends providing for capital appreciation potential in particular areas of the investment universe.

Sector rotation seeks to capitalize on the theory that not all sectors of the economy perform well at the same time. Managers using sector rotation strategies aim to rotate investment capital to sectors they identify as offering profitable investing opportunities. In-depth research on the economy and data from the National Bureau of Economic Research helps to support sector rotation investing. Other types of sector rotation investing may center around seasonal or yearly trends with data supporting advantages to rotating in and out of different profitable categories throughout the year.

Broadly, research on market cycles forms the basis of investment theory around sector rotation investing. Broad market sector rotation investing seeks to follow market cycles of the economy. These cycles can be characterized in various ways but are usually associated with bullish and bearish outlooks as well as recessions, recoveries, expansions and contractions.

Sector rotation strategies following economic market cycles often seek to identify bullish sector opportunities in expanding markets and mitigate losses through sector rotation to safe havens in recessionary markets. In a sense, sector rotation is a concept that most active portfolio managers keep in mind when considering all types of investments. However, implementing sector rotation strategies with significant market depth requires comprehensive foresight and access to in-depth market research for success. Professionally managed sector rotation funds can be a good investment because they seek to maintain positions in the most profitable areas of the market at all stages of an economy’s economic cycle. (See also: Sector Rotation: the Essentials.)

Limitations of Sector Rotation

Sector rotation strategies can be expensive to implement because of the potential costs associated with extensive market trading which can negatively effect returns. Moving capital in and out of sectors can be costly due to trading fees and commissions. For that reason, sector rotation is typically a strategy considered for institutional managers or high net worth investors.

Sector rotation also requires very active analysis of investments and economic data. It is typically a consideration for professional portfolio managers because of the time constraints and data access involved.

Sector Rotation Investment Funds

Sector rotation investment funds are not broadly offered for retail investors in the investment universe. Fidelity manages one fund, the Sector Rotation Fund, which is now closed to new investors. The Fund was launched in December 2009 and reports an annual return of 9.04% since inception. The Fund invests across multiple asset classes. It uses a fund of funds strategy with ETFs invested across market sectors. Weightings of market sectors are adjusted based on sector rotation views.

A number of institutional investment managers also offer sector rotation investing strategies. These managers typically use a fund of funds strategy to obtain market exposure. Institutional investment managers offer sector rotation funds based on the sectors of a single economy or they may also use sector rotation to develop a portfolio of investments across individual countries.

  1. Sector

    A sector is an area of the economy in which businesses share ...
  2. Financial Sector

    A category of stocks containing firms that provide financial ...
  3. Sector ETF

    A class of exchange-traded fund that invests in the stocks and ...
  4. Service Sector

    The portion of the economy that produces intangible goods. According ...
  5. Technology Sector

    The technology sector is a category of stocks relating to the ...
  6. ETF Of ETFs

    ETF of ETFs are exchange-traded funds (ETF) that track other ...
Related Articles
  1. Investing

    Spread Out Risk With Sector-Based ETFs

    These ETFs take the sector rotation strategy from institutional investors and puts it in your hands.
  2. Financial Advisor

    Top-Down Analysis: Finding The Right Stocks And Sectors

    The top-down investment strategy depends on economy and market strength. Find out what you should know before jumping in.
  3. Investing

    How to Choose the Right Sector Funds

    Adding sector funds to your portfolio can pay off but it's important to make sure you're choosing the right market niche.
  4. Investing

    Top 3 Sectors For Value Investors

    As the U.S. economy has recovered, so have the equity markets. Learn the best-value sectors that investors should focus on.
  5. Trading

    3 Sectors to Watch in 2017 (XLF, XLI)

    By analyzing the charts of sector-related exchange-traded funds, three stand out as prime candidates for watch lists in 2017.
  6. Trading

    Why Gilead Stock Is Back in the Game

    President Trump’s softening stance on pharma has allowed biotechs like Gilead to regain some traction.
  7. Trading

    How to Trade a Summer Correction

    The Nasdaq 100 plunged last week on heavy volume, signaling that sharply lower stock prices could be ahead.
  8. Investing

    Analyzing Mutual Fund Risk

    Find out whether a fund's performance is a result of the manager's abilities, or just a fluke.
  9. Investing

    GICS Vs. ICB: Competing Systems For Classifying Stocks

    Global Industry Classification Standards and the Industrial Classification Benchmark separate stocks into sectors.
  10. Investing

    Bank Stocks Poised for More Gains in 2018: CFRA

    As tech stocks dip, financials are soaring higher and could continue their outperformance through 2018.
  1. When during the economic cycle does the financial services sector perform most strongly?

    Find out how some investors use the economic cycle to develop a sector rotation strategy. Find out where financial services ... Read Answer >>
  2. How attractive is the food and beverage sector for a growth investor?

    Learn how the food and beverage sector's volatility makes it attractive to growth investors, and discover how these investors ... Read Answer >>
  3. Why should an investor include an allocation to the drugs sector in their portfolio?

    Learn why investors should consider allocating assets to the drug sector as part of a diversified investment portfolio and ... Read Answer >>
  4. Which stage of the economic cycle is most favorable for the chemicals sector?

    Learn how and why shrewd investors rotate into the chemicals sector during the expansionary stage of the economic cycle and ... Read Answer >>
  5. How does the risk of investing in the retail sector compare to the broader market?

    Learn how retail sector risks compare to the broader market and how investors use this information to achieve the best profits ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center