What is a Sector Rotation?

Sector rotation is a management strategy for investments that involves shifting the balance of investment in a portfolio between different market sectors in response to emerging market trends. It is a form of active investment management, requiring careful monitoring of the market, paired with rapid action to respond to changing conditions. People can practice sector rotation with their own investments or rely on an investment manager or sector fund to handle the mechanics of deciding how, where, and when to invest.

Stocks are commonly broken up into sectors based on the activities of the parent company, such as the technology sector and the manufacturing sector. As market conditions change, various sectors can rise and fall in value as a whole, with greater fluctuation occurring between individual companies in the sector. A skilled investment manager can identify when a sector's fortunes are going to change and buy or sell as needed.

People who engage in sector rotation underweight some sectors and overweight others in their portfolios at any given time. They make decisions about how to weight their investments on the basis of information in financial publications, company announcements, and general economic trends. With every shifting investment, the goal is to take advantage of a change by setting up a portfolio to make a profit.

As with all investment strategies, there can be flaws to sector rotation. Even highly experienced investors can make mistakes when it comes to predicting changes that may occur on the market. People who do not project changes in market conditions accurately may hold stock too long or buy stocks when they should not and can take a loss. It is also possible to end up with poor weighting within an individual sector and suffer when a company struggles while the rest of the sector is doing well.

People who are not interested in actively managing their own investments due to lack of time or concerns about their skills can opt to turn their funds over to someone who specializes in investment management. An investment manager can make decisions to behalf of a client to build up a stable and balanced portfolio and make adjustments when necessary. In an sector rotation investment fund, resources can be pooled with other investors to make broad investments in a number of sectors. Funds can repay investments very well and they can provide people with access to investments that might not otherwise be available.