Sector Rotation: Did Last Year's Leading Sector Lead Again? 1999 to 2025, Measured
Sector rotation is the way leadership in the stock market passes from one group of industries to another, so that the sector with the best return one year is rarely the best the next. It also names the strategy of moving money between sector funds to try to hold whichever group is about to lead.
Sector rotation describes a pattern everyone can see in hindsight: some years technology leads the market, some years energy or utilities do. The measurement below asks the question that matters to anyone acting on it, which is whether the leading sector of one year tends to lead the next. Across 27 calendar years of the Select Sector SPDR funds, it almost never did.
How it works
The stock market is split into sectors. The Select Sector SPDR funds divide the S&P 500 into 11 of them, one fund each: technology (XLK), financials (XLF), energy (XLE), health care (XLV), consumer discretionary (XLY), consumer staples (XLP), industrials (XLI), materials (XLB), utilities (XLU), real estate (XLRE) and communication services (XLC). A sector ETF like these holds only the companies in its group.
Leadership changes because sectors respond to different things. Energy companies earn more when oil prices rise; a bank’s profit depends on the gap between what its loans earn and what its deposits cost; utilities and staples sell what people buy in any economy. When conditions shift, the group that benefits shifts with them, and the money follows.
The strategy tries to move first. A rotation trader shifts from one sector fund to another, betting on which group is about to lead. The usual tool is relative strength, the ratio of a sector’s price to the market’s, which shows which groups have been gaining ground. That is a record of the past; the question is how much of it carries forward.
The business-cycle story, and what this page tests
A popular model maps sectors to the phases of the economy: some groups are expected to lead in a recovery, others near a peak, others in a slowdown. This page does not test that model, because it depends on dating the phases of the economy, and those dates are only settled well after the fact.
It tests the simpler claim a trader can act on. If leadership persisted, buying last year’s winning sector would beat the market. That can be measured directly from fund prices, with no forecasting of the economy at all. The same logic sits behind momentum stocks, applied here to whole sectors over a full calendar year.
Eleven funds with different start dates
The funds did not all exist for the whole period. In Yahoo Finance’s daily history, nine of the funds begin on 22 Dec 1998. Real estate (XLRE) begins on 8 Oct 2015 and communication services (XLC) on 19 Jun 2018. A fund is ranked only in the calendar years it traded from start to finish: nine funds from 1999 to 2015, ten from 2016 to 2018 and all 11 from 2019.
That changes the odds of repeating by chance. With nine funds, a leader chosen at random would lead again one year in nine; with 11, one in 11. Averaged over the 26 year pairs, chance alone gives 2.71 repeats, or 10.4%.
A worked example
Take a hypothetical $10,000 put into the 2022 leader at the end of that year. Energy (XLE) returned 64.32% in 2022 with dividends counted, the best of the 11 funds. In 2023 it returned -0.63%, ninth of 11, so the $10,000 became about $9,937. The same $10,000 in SPY returned 26.18% and became about $12,618. Technology (XLK), which had fallen in 2022, led 2023 at 56.02% and turned $10,000 into about $15,602.
Repeated every year, the rule loses to the plain index. Holding each year’s leader for the following calendar year, from 2000 to 2025, turned $10,000 into $65,656.88. SPY turned the same $10,000 into $73,703.12, and an equal split across the funds available each year, reset every January, into $83,648.37. Holding each year’s worst sector for the next year instead turned it into $20,984.39. These are hypothetical calculations on fund total returns, with no trading costs or taxes, which would lower both rotation results further.
The original data
The data: total returns for each Select Sector SPDR fund and SPY in every calendar year from 1999 to 2025, plus 2026 to 25 Sep, from Yahoo Finance’s dividend-adjusted daily closes (downloaded 26 Sep 2026). Each year is the last close of December divided by the last close of the year before. The yearly returns and ranks are in a CSV of sector returns by year, and each leader’s next-year result is in a CSV of the leaders’ next years.
The leader led again 3 times in 26 year pairs, or 11.5%. Energy repeated in 2005 and again in 2022, and technology in 2020. Chance alone would have produced 2.71 repeats, so persistence at the top was no better than a random pick.
More often, last year’s leader fell back. It beat SPY the following year 11 times out of 26 (42.3%), while across all 251 fund-years from 2000 to 2025 a sector fund beat SPY 47.8% of the time. It finished in the bottom half of the table 14 times (and exactly in the middle twice), its median rank the next year was 6.5, and it came last 3 times: technology in 2000, utilities in 2012 and energy in 2017.
The worst sector became the best 5 times, more often than the best repeated: technology in 2003, financials in 2012, utilities in 2014 and energy in 2016 and 2021. The gap between each year’s best and worst fund had a median of 36.78 percentage points, from 13.84 to 101.95 in 2022.
Shorter periods tell the same story. Across 109 pairs of calendar quarters from early 1999 to mid 2026, the leading fund led the next quarter 12 times (11.0%), against 10.4% by chance, and stayed in the top three 32 times (29.4%), against 31.2% by chance. The quarterly leaders are in a CSV of quarterly leaders.
2026 so far, to 25 Sep: energy leads at +41.51%, technology (the 2025 leader at 24.61%) is second at +36.82%, and consumer discretionary is last at -6.84%, against +14.00% for SPY. Between them sit health care +11.64%, materials +11.22%, industrials +10.75%, staples +7.67%, real estate +5.48%, financials +1.35%, communication services -3.17% and utilities -5.52%. The year is not over, and the full-year ranking is the one the test above uses.
Leadership was spread widely. Technology led in 8 of the 27 years and energy in 6. Utilities and consumer discretionary led 3 times each, financials and health care twice, and staples, industrials and communication services once. Materials and real estate never finished first.
When it fails
Chasing the past year fails most visibly. The record above is the direct test, and buying the leader trailed SPY over 26 years. A yearly table is published after the run has happened, when whatever drove it is already public and in the price.
Rotation on short timeframes adds cost without adding edge. The quarterly result matched chance, and every switch has a spread, a commission or a tax bill in a taxable account. The sector funds page works through those costs.
Sector labels change. Communication services did not exist as a fund until June 2018 and real estate until October 2015, so a long history of sector returns is partly a history of how the sector definitions were drawn. Always check which companies a fund held in the years being compared.
A calendar year is an arbitrary window. A sector can lead from March to March and rank poorly in both calendar years. The quarterly test reduces that problem but does not remove it.
It becomes market timing with extra steps. Moving between sectors is a bet on the timing of economic change, with the same odds against getting both the exit and the entry right.
Related
The sector ETF page covers what each fund actually holds and why one sector is a concentrated view. Relative strength explains the ratio rotation traders use to rank sectors, and momentum stocks applies the same buy-what-rose logic to single companies. For the index these funds are carved from, see the S&P 500 page.
I treat a sector’s past year as information about the past year and nothing more. Before I move money into last year’s leader, I write down why the next twelve months should look like the last twelve, and if I cannot, I leave the index position alone.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.