These sectors historically outperform the market when the economy is expanding and consumers and businesses have greater demand for related products or services. Cyclical sectors include companies where consumers make discretionary spending (like retailers and restaurants) or technology providers. On a very simple level, you can enact sector rotation in your portfolio by moving among two main categories of stocks: cyclical and defensive stocks. Sector rotation strategies can be as simple or as complex as investors make them. Because some sectors are inherently more sensitive to economic changes than others, rotating money in or out of stocks or funds that track those sectors could result in higher returns. Sector rotation works by “rotating” in and out of various sectors to take advantage of changes in the pace of economic growth or movement through the phases of the economic cycle, from expansion to recession. This is in contrast to so-called passive investing strategies that involve buying an investment and holding onto it for years or decades. This may allow you to capitalize on a change in economic conditions and earn higher returns.īecause it involves hands-on management of your funds, sector rotation is a type of active investment strategy. To do this, you simply sell stocks or funds in one sector and then use those proceeds to invest in another. Sector rotation refers to taking money that’s invested in one stock market sector and moving it to another. Not only does this help investors’ general understanding of the market, but it also enables them to invest strategically to take advantage of growing sectors while moving out of those that are struggling. By dividing up public companies in this way, investors can more easily understand how segments of the economy are functioning and identify shifts in the broader stock market. The stock market is broken down into what’s known as stock sectors, which group together public companies that operate in related industries and perform similarly.
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