Sector Rotation in Times of Crises

Abstract

We study a sector rotation strategy that switches among equity sectors and from equities to T-bills based on signals of a high-volatility regime in equities. We find that an implementation of the strategy using highly liquid sector-specific ETFs would have earned 6.6% more than the S&P 500 per year during the period December 1998 to December 2020, while experiencing much lower volatility. The performance of the strategy is especially strong during crisis periods such as the 1998–2002 crash and recession, the 2008–2009 Great Recession, and the COVID-19 recession, with much higher and smoother returns than the S&P 500.