Sector rotation ETFs
Introduction
There are a number of ETFs that use sector rotation as an investment strategy. Every public company is categorized into one of 11 sectors - read more about sectors. It is well documented that in any given year, certain sectors of the stock market perform better than others.
The question is whether an investor can successfully buy and sell stocks in whatever the current "hot" sector is. There are a handful of ETFs that are using such a "sector rotation" strategy. Here are the ETFs if you want to read some examples of the approaches taken by sector rotation ETFs:
| Name | Symbol | Last price | Currency | AUM | Expense ratio, % | Inception date |
|---|---|---|---|---|---|---|
| First Trust Dorsey Wright Focus 5 ETF | XNAS:FV | 62.08 | USD | 3,495,553,706 | 0.90 | Mar 06, 2014 |
| Northern Lights Fund Trust IV Main Sector Rotation ETF | BATS:SECT | 62.69 | USD | 2,035,948,500 | 0.77 | Sep 06, 2017 |
| SPDR SSGA U.S. Sector Rotation ETF | ARCX:XLSR | 59.90 | USD | 669,460,000 | 0.70 | Apr 02, 2019 |
| Day Hagan/Ned Davis Research Smart Sector ETF | ARCX:SSUS | 48.28 | USD | 568,835,250 | 0.79 | Jan 17, 2020 |
| Cabana Target Leading Sector Moderate ETF | XNAS:CLSM | 23.48 | USD | 164,200,457 | 0.79 | Jul 13, 2021 |
| First Trust Dorsey Wright Dynamic Focus 5 ETF | XNAS:FVC | 35.74 | USD | 145,296,876 | 0.84 | Mar 18, 2016 |
| AdvisorShares Dorsey Wright FSM US Core ETF | XNAS:DWUS | 52.78 | USD | 120,319,943 | 0.75 | Dec 27, 2019 |
| Anfield U.S. Equity Sector Rotation ETF | BATS:AESR | 17.20 | USD | 119,776,000 | 1.11 | Dec 17, 2019 |
| Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF | ARCX:SZNE | 36.43 | USD | 37,720,000 | 0.60 | Aug 02, 2018 |
| Pacer WealthShield ETF | BATS:PWS | 32.56 | USD | 19,110,000 | 0.60 | Dec 12, 2017 |
| RH Tactical Rotation ETF | ARCX:RHRX | 18.84 | USD | 15,262,035 | 1.36 | Nov 09, 2021 |
| ProShares Equities for Rising Rates ETF | XNAS:EQRR | 67.67 | USD | 13,746,370 | 0.35 | Jul 25, 2017 |
How sector rotation works
The idea behind sector rotation is rooted in the business cycle. As the economy moves through phases — early recovery, expansion, late cycle, and recession — different sectors tend to lead. Cyclical sectors like consumer discretionary, industrials, and technology typically outperform during economic expansion, while defensive sectors such as utilities, healthcare, and consumer staples tend to hold up better in downturns. Sector rotation strategies attempt to identify the current phase and shift capital toward the sectors most likely to benefit.
Most sector rotation ETFs rely on one of three approaches: momentum-based signals (relative strength of sectors over recent months), macroeconomic models (correlating sector performance with indicators like interest rates, PMI, or yield curves), or a combination of quantitative and qualitative analysis from a portfolio management team.
An alternative to using dedicated sector rotation ETFs is a do-it-yourself approach, where investors manually rotate between individual sector ETFs such as the Select Sector SPDR series (XLK, XLF, XLE, XLV, etc.) based on their own analysis of economic conditions and sector momentum.
Let's look at the approaches used by these ETFs.
FV - First Trust Dorsey Wright Focus 5 ETF
Seeks to track, before fees and expenses, the Dorsey Wright Focus Five Index. The Index is designed to provide targeted exposure to the five First Trust sector and industry based ETFs that DWA believes offer the greatest potential to outperform the other ETFs in the selection universe.
FVC - First Trust Dorsey Wright Dynamic Focus 5 ETF
Seeks to track, before fees and expenses, the Dorsey Wright Dynamic Focus Five Index. The Index is designed to provide targeted exposure to five First Trust sector and industry based ETFs and the Nasdaq US T-Bill Index (the "cash index"). The Index combines Dorsey, Wright & Associates' (DWA) systematic momentum approach to sector rotation and risk management via cash equivalents represented by 1- to 3-month U.S. Treasury bills in the cash index. To construct the index, DWA begins with the universe of First Trust sector and industry ETFs and the cash index. Using the DWA proprietary relative strength methodology, the ETFs are compared to each other to determine inclusion by measuring each ETF's price momentum relative to other ETFs in the universe. Each ETF is given a score that allows the index to objectively determine where it ranks relative to all other ETFs in the universe and five ETFs that satisfy certain trading volume and liquidity requirements are selected for inclusion. The relative strength analysis is conducted twice monthly. ETFs are replaced when they fall sufficiently out of favor, based on their relative strength, versus the other ETFs within the universe. When an ETF is added or removed, the index is rebalanced so each ETF position is equally weighted. The Index can gain varying amounts of exposure to the cash index when the relative strength of more than one-third of the universe of First Trust ETFs begins to diminish relative to the cash index. The cash index is evaluated twice monthly. The cash index may constitute between 0% and 95% of the index, but is limited to an increase or decrease of no more than 33% per evaluation.
EQRR - ProShares Equities for Rising Rates ETF
Note: EQRR uses a rate-correlation methodology rather than a traditional sector rotation approach. It is included here because its sector selection changes over time based on shifting correlations, though its primary thesis is rising interest rates rather than business cycle timing.
Seeks to track, before fees and expenses, the Nasdaq U.S. Large Cap Equities for Rising Rates Index. The goal of the Index is to provide relative outperformance, as compared to traditional U.S. large-cap indexes, such as the S&P 500, during periods of rising U.S. Treasury interest rates. The Index selects 50 stocks using a three step process: 1) Eleven Nasdaq sector indexes are ranked on their weekly correlation with the US 10-year Treasury yield over the previous three years. 2) Each security in the Nasdaq US 500 Large Cap Index is ranked on its weekly market-neutral correlation with the US 10-year Treasury yield over the previous three years. 3) The Index selects the top 5 securities with the highest correlation with the US 10-year Treasury yield over the previous three years from the top 5 sectors with the highest correlation with the US 10-year Treasury yield over the previous three years, for a total of 50 stocks. The five selected sectors in the Index are given the following weights based on their sector index correlation rank: #1 ranked sector – 30%, #2 ranked sector – 25%, #3 ranked sector – 20%, #4 ranked sector – 15%, #5 ranked sector – 10%. The 50 securities selected for the Index are assigned an equal weight within their respective sector. The Index is rebalanced and reconstituted quarterly on the last Friday of March, June, September and December.
SECT - Main Sector Rotation ETF
This is an actively managed fund that seeks to outperform the S&P 500 in rising markets while limiting losses during periods of decline. The fund seeks to achieve its objective through dynamic sector rotation. Sector selection is optimized by carefully reviewing the sector, industry, and sub-industries in the fund’s portfolio and allocating to sectors which appear undervalued and poised to respond favorably to financial market catalysts.
PWS - Pacer WealthShield ETF
Seeks to track, before fees and expenses, the Pacer WealthShield Index. The Index uses a trend-following strategy that directs some or all of its exposure to U.S. equity securities or U.S. Treasury securities depending on the strength of the high-yield corporate bond market relative to U.S. Treasury bonds and the momentum of certain U.S. equity sectors or industries and of long-term U.S. Treasury bonds. Every month the index will run the risk indicator calculations to determine whether the index constituents will be RISK ON or RISK OFF. On the third to last business day of the month, the Index will observe the ratio between the S&P 500 High Yield Corporate Bond Total Return Index (SP5HYBIT Index) and the S&P U.S. Treasury Bond 7-10 Year Total Return Index (SPBDU10T Index). If that ratio is above its 5 month exponential moving average (RISK ON), the index exposure will be 100% equities or a blend of equity and 3 month US treasury bills. If that ratio is below its 5 month exponential moving average (RISK OFF), the index exposure will be 100% 20 year US Treasury bonds (SPBDUSLT Index) or 100% 3 month US T-bills (SPBDU3T Index). When in risk mode, the Index selects 5 sectors using relative strength of their six month total return. Equity exposures are selected from 10 S&P Sector Indices, the S&P Biotech Select Industry Index, and the Dow Jones Internet Composite Index.
SZNE - Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF
Note: SZNE follows a fixed seasonal calendar rather than responding to economic or market conditions. It rotates between defensive sectors (May–October) and cyclical sectors (November–April) based on historical seasonal patterns in stock market performance.
Seeks to track, before fees and expenses, the Pacer CFRA-Stovall Equal Weight Seasonal Rotation Index. The Index invests equally in the S&P 500 Equal Weight Consumer Staples and Health Care sectors from May through October. From November through April, it invests equally in the S&P 500 Equal Weight Consumer Discretionary, Industrials, Information Technology and Materials sectors.
XLSR - State Street U.S. Sector Rotation ETF
This is an actively managed fund that seeks to provide capital appreciation by tactically allocating among the GICS-defined sectors of the S&P 500 Index. The investment approach combines quantitative and qualitative analysis and dynamically adjusts active risk budgets relative to the benchmark. Typically rebalanced monthly, but rebalancing may occur more or less frequently depending on market conditions.
AESR - Anfield U.S. Equity Sector Rotation ETF
This is an actively managed fund that seeks to outperform traditional large-cap equity indices and styles over full market cycles by investing in various sectors of the equity market using ETFs. Based on the Sub-Adviser’s tactical investment style, the Fund will invest in ETFs based on the Sub-Adviser’s macroeconomic and asset cycle investing methodology that determines the rank order of equity sectors, and then makes periodic shifts to i) capitalize on market opportunities, or ii) avoid market declines. The Fund expects to hold between eight to ten ETFs at any given time. The core of the Fund’s portfolio will be comprised of a combination of the 11 main industry sectors that make up the S&P 500 Index, although additional positions may be included in the Fund’s securities. Over- and under-weights of industry sectors are determined by the overall market and sector outlook. The Fund is generally rebalanced and adjusted on a quarterly basis, or when changing conditions warrant an adjustment.
DWUS - AdvisorShares Dorsey Wright FSM US Core ETF
This is an actively managed fund that seeks total return. The Advisor allocates the Fund’s portfolio investments using research obtained from the FSM Core Solution US Core Model (the “FSM US Core Model”), a proprietary model developed by Dorsey, Wright and Associates, LLC (“DWA”). The FSM US Core Model applies a proprietary ranking system based on certain technical indicators to a pre-determined universe of US large-cap ETFs, selected by DWA. Each ETF within the universe that ranks in a top tier is included in the model. If an ETF in the portfolio no longer ranks in a top tier at the time of rebalancing, then that ETF is removed and the position is allocated to a Defensive Investment. The Advisor uses the FSM US Core Model to measure the relative ranking of the Fund’s core portfolio. When the model identifies broad equity weakness and cash strength, the Advisor will sell equity positions in order to allocate some or all of the portfolio to Defensive Investments. When the Fund is invested in Defensive Investments, the Advisor will shorten the Fund’s rebalancing frequency to seek to move back into equity ETF positions once the model again identifies favorable equity market conditions.
SSUS - Day Hagan/Ned Davis Research Smart Sector ETF
This is an actively managed fund that seeks long-term capital appreciation and preservation of capital. A proactive, adaptive strategy, SSUS is incorporated in the U.S. and considered a “fund of funds” that, under normal market conditions, seeks to achieve its investment objective by principally investing in unaffiliated equity ETFs that track the performance of the individual sectors of the S&P 500 index. The strategy seeks to enhance returns over a buy-hold, equity benchmark by overweighting and underweighting S&P 500 sectors based on NDR’s proprietary sector model. It will also seek to mitigate the effects of major market declines by reducing equity market exposure through NDR’s Catastrophic Stop model, which triggers a shift toward defensive positions when broad market indicators signal elevated risk of a significant drawdown.
CLSM - ETC Cabana Target Leading Sector Moderate ETF
This is an actively managed fund that seeks to provide investors and advisors with exposure to sectors of the economy that we believe will potentially provide superior investment returns.
INRO - iShares U.S. Industry Rotation Active ETF
This is an actively managed fund launched by BlackRock in March 2024 that seeks long-term capital appreciation. The fund is managed by BlackRock's Model Portfolio Solutions team and dynamically allocates across U.S. industries based on forward-looking macroeconomic and fundamental analysis. Unlike pure sector-level rotation, INRO rotates at the industry level — for example, shifting from semiconductors to biotechnology based on changing conditions. The fund holds approximately 470 individual stocks.
HYSA - BondBloxx USD High Yield Bond Sector Rotation ETF
This is an actively managed fund that applies sector rotation principles to the high-yield corporate bond market. The fund rotates between various BondBloxx sector-specific high yield bond ETFs based on relative value and momentum signals. This approach extends the sector rotation concept beyond equities into fixed income, targeting sectors where credit spreads offer the best risk-adjusted returns.
RHRX - RH Tactical Rotation ETF
This is an actively managed fund that seeks capital appreciation. The Advisor seeks to achieve the Fund’s investment objective of capital appreciation by investing in exchange-traded funds. The Advisor utilizes sector rotation strategies that attempt to capitalize on changes in the business cycle. The Advisor uses and investment model for analyzing market trends. The investment model includes factors such as price momentum, volatility, comparative indicators relative to certain indices and a recession model (a model that measures the probability of a recession within the next several months based on leading economic indicators). When the Advisor’s model indicates a negative market trend, the Fund may utilize defensive investments, including ETFs that invest in treasury bonds, exchange traded notes (“ETNs”) and leverage and inverse ETFs. The Fund may hold significant cash or inverse ETF positions during unfavorable market conditions.
Do sector rotation ETFs actually outperform?
The track record of sector rotation ETFs is mixed at best. Several academic studies have found that sector rotation strategies tend to underperform simpler buy-and-hold approaches over long periods. In practice, most sector rotation ETFs have lagged the S&P 500 over trailing 5-year periods. The higher expense ratios of actively managed rotation funds (typically 0.40%–1.00%) add a further drag compared to broad market index funds with expense ratios below 0.10%.
That said, some rotation strategies have shown value in managing downside risk. Funds like PWS and FVC that include a "risk off" mechanism — shifting to treasury bonds or cash equivalents when market conditions deteriorate — may reduce drawdowns during bear markets, even if they sacrifice some upside in bull runs.
Risks to consider
Sector rotation ETFs carry several risks beyond standard equity market risk. Timing risk is the most fundamental — correctly identifying economic turning points is notoriously difficult, and even professional economists frequently get it wrong. These funds tend to have higher expense ratios than passive sector ETFs, and the frequent trading inherent in rotation strategies can generate higher tax liabilities in taxable accounts. Many of these ETFs are relatively small in terms of assets under management, which can mean wider bid-ask spreads and lower liquidity. Finally, because they are concentrated in a handful of sectors at any given time, they lack the diversification of a broad market index fund.