A Sector Rotation Strategy with Exchange-Traded Funds (ETFs)

A sector rotation strategy is one that is undertaken by investors by actively managing their portfolios through asset allocation based on the status of the economic cycle and the businesses that tend to perform best at that specific point in the cycle. The term “sector” is used to describe a group of stocks that operate in a similar line of business and are affected by changes in the economy in similar ways and a sector rotation strategy calls for the active participation of the investor to periodically review portfolio holdings and make adjustments as the economic cycle progresses. While a sector rotation strategy is more time-consuming than a more passive strategy (like indexing) it has the potential to outperform those approaches.

Sector and industry exchange-traded funds (ETFs) provide one easy way for investors to implement a sector rotation strategy. Sector ETFs are built with stocks (or other instruments) from a single market to provide investors with “concentrated diversification” while reducing the risk associated with picking individual stocks. Sector ETFs are offered for a number of different industries, including healthcare, technology, and utilities.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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