What is a sector rotation strategy?
These strategies aim to take advantage of the natural rhythm of economic and market shifts to manage risk.
Sector rotation is an active investing approach that looks to capture changes in market leadership across different parts of the economy. Not all sectors perform the same at all times. As an example, technology might lead during growth periods, while energy or health care can shine in other stages of the economic cycle.
By shifting exposure between sectors based on changing market conditions, investors can lean into areas showing strength and step back from those losing momentum. This may help boost returns and manage risk more effectively over time.
How the Multi-Asset Solutions Team does it differently
The Multi-Asset Solutions Team at Sun Life Global Investments has built a disciplined, research-driven process that combines three key models. Each one focuses on a different market driver.
1. Economic backdrop model
This model studies real-time data like growth, inflation, interest rates and policy trends to pinpoint where we are in the business cycle. It then tilts the portfolio toward sectors that have historically performed best in similar conditions.
2. Valuation model
This model identifies which sectors are attractively priced compared to their historical averages and peers. It helps the portfolio lean toward value opportunities and avoid overheated areas. To prevent “value traps” – cheap sectors that stay cheap for the wrong reasons – the team uses a momentum filter to confirm strength before investing.
3. Market leadership model
This model tracks momentum, both long and short term, to find sectors that are beginning to outperform. It helps the portfolio stay aligned with where investor confidence and capital are moving.
Each model “votes” on which sectors look most attractive. The team combines those votes using a weighted system to decide which sectors to overweight. This multi-model design avoids relying on any one signal, making the process more consistent and increasing reliability across different market environments.
Why this strategy belongs in the ETF+ Portfolios1
Markets move in cycles – leadership shifts as growth, inflation and interest rates change. A U.S. sector rotation strategy adds flexibility to a portfolio by adjusting its exposure as those shifts unfold. It helps capture market gains when new leaders emerge and may protect during downturns.
This approach fits neatly alongside the ETF+ Portfolios’ long-term asset allocation strategy. It adds an extra source of return potential that adapts over time, improving diversification and helping the portfolios stay resilient as markets evolve.
Sector rotation aims to:
- Capture performance from leading sectors
- Avoid concentration in weak areas
- Strengthen diversification through changing cycles
Case study: How sector rotation works in a shifting economic environment
In a hypothetical year when inflation rises quickly, interest rates increase and economic data weakens, different parts of the market should respond in different ways. Against this backdrop, a systematic sector rotation process should naturally adjust based on the signals it reads.
When inflation increases and economic growth slows:
- An economic backdrop model should point to sectors that tend to hold up better in late economic-cycle conditions. For example, rising commodity prices can lift the energy sector, while steady earnings patterns may support health care, consumer staples and utilities.
- At the same time, a valuation model may flag these defensive sectors as more reasonably priced than areas that were expensive when the economy was stronger.
- A market leadership model, which tracks price trends and relative strength, could show momentum building in energy and defensive areas. Meanwhile, sectors more sensitive to higher interest rates – like parts of technology or consumer discretionary – may lose leadership and lag in performance.
Together, these three models help to create a more complete picture. The economic backdrop model explains why certain sectors tend to behave differently, the valuation model shows where pricing may be more attractive and the market leadership model identifies when leadership is shifting. In an environment of high inflation and slowing growth, using all three can help keep the portfolio construction process grounded in data and adjust sector exposures in a disciplined, consistent way as conditions change.
The bottom line
The addition of a U.S. sector rotation sleeve is designed to make the ETF+ Portfolios more agile and innovative. By using lower-cost sector ETFs, leadership shifts are identified efficiently without adding complexity or high active management costs.
The U.S. sector rotation sleeve showcases how the MAS Team’s growing research capability translates data-driven insight into real, actionable portfolio decisions. It also complements the ETF+ Portfolios’ other modern sleeves – gold and private fixed income – helping the equity core remain adaptive, cost-effective and ready for whatever the next market cycle brings.
1Sun Life ETF+ Portfolios are mutual fund trusts that invest in a portfolio of ETFs and mutual funds and are actively managed by SLGI Asset Management Inc. Exposure to private fixed income is achieved through investment in the SLC Management Private Fixed Income Plus Fund. Indirect exposure to gold is achieved by investing in underlying ETFs that seek to replicate the performance of the price of gold bullion.
Case study information in this article is hypothetical in nature and is provided for illustrative purposes only. Case studies assume certain material factors or apply certain assumptions to draw conclusions believed to be representative of how a particular strategy may perform in the circumstances or economic environment depicted in that case study. These illustrations are not intended to represent the actual past or future performance of any investment fund managed by SLGI Asset Management Inc as there could be additional complexities outside the scope of materials discussed in this article. Actual performance of the strategy could vary materially.
Information contained in this article is provided for information purposes only. It is not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.