Combining TAA with Sector Timing

Replacing Broad Beta with Targeted Sector Exposure

Hi there,

Over the past few weeks, I’ve walked through two separate ideas:
(1) A Tactical Asset Allocation (TAA) model, and
(2) A Sector Rotation Strategy that times equity sectors based on changes in interest rates.

In the standard version of the TAA model, equity exposure comes from SPY (or leveraged variants like SSO and SPXL). A reader recently asked a natural follow-up question:

What if, instead of broad index exposure, we use the sector-timing model as the TAA’s equity sleeve?

For many investors, sector exposure is often more intuitive because it reflects how the economy actually evolves as sector leadership changes over time. Sector leadership, whether growth vs. value or cyclical vs. defensive, carries information about the macro environment that is largely muted when holding the broad index.

Using sectors as the equity sleeve can offer:

• More expressiveness, the portfolio allocates to parts of the market with the strongest macro tailwinds.

• Greater transparency, you can see which themes are driving equity exposure, rather than everything being blended inside SPY.

• A more interpretable link to macro conditions, shifts in interest rates, and inflation/growth expectations show up directly in sector dispersion.

So in today’s post, we integrate the sector rotation signal into the TAA framework and discuss how replacing SPY/SPXL with the sector-timing approach impacts performance.