ETF Trends
ETF Trends

As it turned out, the most recent Great (Sector) Rotation was short lived and perhaps not so great after all.

But although defensive sectors are back to outperforming cyclical sectors amid June market volatility, I still believe there’s a strong case for preferring cyclicals over defensives, or at least select cyclicals.

There are three reasons to consider investing in cyclical sectors now.

1. Attractive Valuations. Defensive sectors continue to look overpriced. Investors searching for safety and yield have driven up the valuations of defensive companies. The three classic defensive sectors – healthcare, staples and utilities – are now trading at an average premium of around 20% to the broader market. By way of comparison, back in the fall of 2009, these three sectors were trading at an average discount of around 40% to the broader market. Current premiums seem unjustified considering that profitability is somewhat lower for companies in the defensive space.

2. Exposure to Emerging Markets. Second, cyclical sectors, particularly technology and industrials, generally have more exposure to emerging market growth than their defensive counterparts. This means that they’re a good way to access my preference for emerging markets without actually investing directly in emerging markets themselves.

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