APPLICATION OF SECTOR ROTATION IN ACTIVE PORTFOLIO MANAGEMENT FOR US AND EU STOCK MARKETS

Abstract

The paper deals with active portfolio management through sector rotation. Focusing on European and American markets, it introduces the reader to the intricacies of sector rotation in active investing using a carefully selected investment strategy. We aim to propose and validate an investment approach that combines monetary policy changes with momentum. We construct our investment portfolios by constructing sector-specific exchange-traded funds (ETFs) for the European and U.S. markets. We analyze monthly data from March 2003 to March 2023 to evaluate performance. Our investigation covers several critical aspects, such as market efficiency, active vs. passive investing, a comparison between active and passive investment approaches and Bottom-Up vs. Top-Down approaches. We explore the merits of these contrasting strategies in active investing. To guide our investment decisions, we closely monitor interest rate changes. Specifically, we track adjustments made by the European Central Bank (ECB) for European markets and the Federal Reserve (FED) for U.S. markets. These serve as monetary easing and tightening indicators, respectively, reflecting expansionary and restrictive policies. Our sector ETFs are strategically selected based on these interest rate changes, either cyclically or defensively. Subsequently, we evaluate the performance of our portfolios using momentum strategies. Notably, our proposed strategy effectively reduces market risk in the E.U. and U.S. markets. Our portfolios surpass the benchmark STOXX600 across all metrics in the European markets. However, in the U.S. markets, the benchmark S&P500 exceeds the performance of all our portfolios.