Does Style Make the Sector

Aug 26, 2011

Sector rotation strategies are a staple of finance textbooks. This paper discusses sector rotation strategies and contributes beyond the typical literature by highlighting the need to look at the style profile within each sector. Most of the earlier studies on sector rotation focus on the links between industry membership and the macroeconomic or market cycles. We find that style exposures play an important role in sector performance, and returns driven by style effects can dominate returns due to industry membership. Our results suggest that analyzing and managing the style profile of sector rotation strategies can be a key component for the successful implementation of such strategies.