Sector Rotation and the Momentum Factor

  • Sector rotation is a popular investment strategy whereby managers actively reallocate capital from one investment sector to another based upon changing market conditions.
  • There are many ways to run sector rotation strategy, including: business cycle indicators, macroeconomic indicators, value-based, momentum-based, trend-following, et cetera.
  • Anecdotally, relative strength (momentum) systems are one of the most popular approaches.
  • Utilizing a construction technique similar to the single-stock momentum factor, we ask whether sector rotation is meaningfully different than the momentum factor.
  • We find that sector rotation is entirely subsumed by the momentum factor, but may still be an interesting approach for investors willing to sacrifice outperformance potential in effort to reduce exposure to momentum crashes.

Source: Sector Rotation and the Momentum Factor | Flirting with Models

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