SECTOR ROTATION
Overview
Shift your portfolio allocation between sectors based on where you are in the economic cycle. Overweight outperforming sectors, underweight lagging ones. Uses sector ETFs for easy implementation.
Setup
- 1.Monitor leading economic indicators: ISM Manufacturing PMI, yield curve, credit spreads, consumer confidence.
- 2.Identify current economic cycle phase (expansion, peak, contraction, recovery).
- 3.Use sector ETFs (XLK, XLF, XLE, XLV, XLU, XLP, XLRE, XLI, XLB, XLC) to adjust allocation.
- 4.Maintain core diversified position (e.g., 60-70% in broad index ETFs).
- 5.Rotate tactical allocation (30-40%) into overweight sectors.
Max profit
Sector outperformance over broad market can be 20-40% in a favorable year.
Max loss
Sector underperformance — wrong sector bets can lag the market by 20%+.
Breakeven
Must outperform the passive benchmark to justify the added complexity and trading costs.
When to use
When economic cycle signals are clear and leading indicators align. When willing to do ongoing research on macroeconomic conditions.
When to avoid
In highly uncertain or rapidly changing macro environments. When leading indicators conflict. When transaction costs and taxes erode tactical gains.