This article is not designed to get into the argument of Active vs. Passive managed funds or efficient vs. inefficient market hypothesis, but rather to show you strategies for how you can add "Alpha" (the outperformance of value add of a particular strategy over the benchmark index) by rotating some sector strategies based on where the business (or economic) cycle is.
One of the benefits of mutual funds or ETF's is that they enable you to invest in a certain segment of the market without having to choose one specific stock. This way you take part in that sectors potential growth without worrying that the stock you selected may not be the "winner" of the group. With the advent of sector specific mutual funds and ETF's you can now allocate a portion of your portfolio into specific sectors you believe will outperform the general market.
HOW CAN A PERSON DETERMINE WHAT WILL OUTPERFORM?
Unfortunately there is no guarantee on what sector will outperform, but utilizing the above chart on where you believe the business cycle is and a little historical research on which market sectors perform best in each cycle may give you that opportunity to boost your performance in excess of the market returns. Let's explore:
Stage 1: coming out of recession (or early bull market) the sectors that typically lead are Financials, Technology and Consumer Discretionary areas.
Stage 2: well into the bull (mid to late bull market) the sectors that typically lead are Materials, Industrials, Energy and Telecom.
Stage 3: the bull transitions into a bearish market so the defensive sectors begin to outperform: Healthcare, Consumer Staples, Utilities.