Sector Rotation

Lesson

Sector rotation is a portfolio management strategy that involves shifting investments from one industry sector to another in anticipation of market trends and economic cycles. This strategy aims to capitalize on the changing performance of various sectors as the economy moves through different stages of growth and contraction. Investors who employ sector rotation seek to identify the sectors likely to outperform the market and allocate their assets accordingly.

Practice Question #1

Which of the following best describes sector rotation?

A) Investing in a single sector for the long term

B) Shifting investments from one sector to another based on market trends and economic cycles

C) Maintaining a balanced portfolio across all sectors

D) Investing in sectors with the highest dividend yields

Select an option above to see an explanation here.

A) Investing in a single sector for the long term does not involve rotation. B) Sector rotation involves shifting investments from one sector to another based on market trends and economic cycles. C) Maintaining a balanced portfolio across all sectors is a diversification strategy, not sector rotation. D) Investing in sectors with the highest dividend yields is a dividend-focused strategy, not sector rotation.

Terms

Sector rotation:: A portfolio management strategy that involves shifting investments from one industry sector to another based on market trends and economic cycles.

Practice Question #2

Which of the following sectors is considered a defensive sector?

A) Technology

B) Consumer discretionary

C) Utilities

D) Financials

Select an option above to see an explanation here.

A) Technology is a cyclical sector. B) Consumer discretionary is a cyclical sector. C) Utilities is a defensive sector that performs well during economic downturns. D) Financials is a cyclical sector.

Do Not Confuse With

Passive investing:: An investment approach that seeks to replicate the performance of a market index rather than actively selecting individual securities.
Tactical asset allocation:: A dynamic investment strategy that adjusts a portfolio's asset allocation based on short-term market trends and economic conditions.

Practice Question #3

What is the primary goal of a sector rotation strategy?

A) To minimize risk through diversification

B) To generate consistent returns regardless of market conditions

C) To capitalize on the changing performance of various sectors as the economy moves through different stages of growth and contraction

D) To replicate the performance of a market index

Select an option above to see an explanation here.

A) Minimizing risk through diversification is a goal of diversification strategies, not sector rotation. B) Generating consistent returns regardless of market conditions is a goal of market-neutral strategies, not sector rotation. C) The primary goal of a sector rotation strategy is to capitalize on the changing performance of various sectors as the economy moves through different stages of growth and contraction. D) Replicating the performance of a market index is a goal of passive investing, not sector rotation.

Historical Example

During the technology boom of the late 1990s, many investors employed a sector rotation strategy to capitalize on the rapid growth of technology stocks. As the economy began to slow down in the early 2000s, these investors shifted their assets to more defensive sectors, such as consumer staples and utilities, which tend to perform well during economic downturns.