Multi-factor rotation now seen in an ETF

 

The rotation of sector and factors based on the economic environment has been take to a new level with an active ETF that will allocate among risk factors based on the business cycle.  These rotation strategies state the risk for different sectors and factors change with economic growth. Defensive sectors or quality firms will do better in a contractionary period while cyclicals and value will do better during recoveries. Risk premia for sectors and factors are time varying and can be exploited. Of course you have to know the relationship between these risk premia and the business cycle and you need to make a good forecast on the business cycle. 

The core model for most of this factor work is based on the idea that the business cycle can be divided into four regimes: recovery, expansion, slowdown, and contraction. The risk factor set includes: size, value, momentum, volatility and quality. The economic regime is defined by a set of key macro indicators to measure economic growth and market sentiment. (See IMFL from Invesco.)

It has been found that low volatility has done poorly before a recession but is a good defensive strategy when the contraction happens. Momentum will do well during an expansion, and value will do well during a recovery. Unfortunately, there are few events to test these rotation strategies. It is hard to make an empirical argument when there have only been three major business cycle events in the last 25 years: the 2000 tech bubble, the GFC, and the pandemic.