| Definition |
Investment strategy of shifting investments between different sectors based on economic cycles. |
Strategy of reallocating investments across different asset classes (stocks, bonds, cash, commodities). |
| Focus |
Focuses on moving money between various sectors within the equity market. |
Focuses on moving money between broader asset classes. |
| Goal |
To capitalize on sector-specific performance trends during different phases of the economic cycle. |
To optimize risk-adjusted returns by adjusting allocation among asset classes based on market conditions. |
| Basis |
Based on economic indicators, sector performance, and business cycles. |
Based on macroeconomic factors, interest rates, inflation, and market outlook. |
| Instruments |
Primarily stocks or ETFs representing specific sectors. |
Includes stocks, bonds, cash, commodities, real estate, and others. |
| Risk Management |
Manages sector-specific risks by diversifying across sectors. |
Manages overall portfolio risk by diversifying across asset classes. |
| Time Horizon |
Medium-term focus aligned with sector cycles (months to quarters). |
Can be short to long-term depending on market outlook. |
| Volatility |
Can be relatively higher due to concentration in equity sectors. |
Generally lower volatility due to diversification across asset types. |
| Performance Drivers |
Sector earnings, regulatory changes, innovation, and sector rotation trends. |
Interest rates, inflation, economic growth, and monetary policies. |
| Example Strategy |
Shifting from technology sector to consumer staples as economy matures. |
Moving from stocks to bonds or commodities during market downturns. |
| Investor Type |
More suitable for equity-focused investors with sector knowledge. |
Suitable for diversified investors seeking balanced risk and returns. |
| Complexity |
Requires monitoring sector trends and economic cycles closely. |
Requires broader understanding of macroeconomic factors and asset class behaviors. |
| Tax Implications |
Capital gains tax applies on sector trades, depends on holding period. |
May have different tax treatments depending on asset classes (e.g., bonds vs equities). |
| Liquidity |
High liquidity due to equity market trading. |
Varies; stocks and bonds usually liquid, some assets like real estate less so. |
| Correlation |
Intra-equity correlation affects returns (sectors can move together). |
Lower correlation among asset classes improves diversification. |
| Tools Used |
Sector ETFs, mutual funds, individual stocks. |
Asset allocation models, balanced funds, ETFs across asset classes. |
| Market Conditions |
Effective in trending markets with clear sector leaders. |
Effective across market cycles by adjusting risk exposure. |
| Portfolio Impact |
Can enhance equity returns but with higher sector risk. |
Improves risk-adjusted returns and reduces portfolio volatility. |
| Typical Allocation Shift |
Switching among technology, healthcare, financials, consumer sectors. |
Rebalancing between equities, bonds, cash, and alternative assets. |
Sector Rotation vs Asset Rotation