Veda Financial | August 2025

One of the most effective ways to reduce risk while still participating in market growth is through tactical industry and sector rotation. By staying alert to where capital is flowing, we can help smooth volatility and still capture gains from the strongest performers.

So far in 2025, three industries have stood out:

1. Defense: 

“Nobody likes war—but defense markets are booming”

We have seen growth of 30%+ this year across U.S. and international defense markets. Rising geopolitical tensions and higher government spending continue to support the sector’s strength.

Notable companies include Elbit Systems, whose backlog jumped 13% to nearly $24 billion, pushing shares up about 69% year-to-date. In Europe, defense indices have outpaced the broader market by a wide margin.

Rotation takeaway: Defense has historically been a stabilizer during uncertain times, making it a valuable tactical holding when volatility rises.

2. Artificial Intelligence: 

“When machines learn, markets listen”

We have seen 20–30% growth this year in broad AI indices, with even higher gains in select companies. The Morningstar Global Next-Gen AI Index is up +26.7% YTD, reflecting strong demand for chips, infrastructure, and digital solutions.

Leaders like Palantir (+115% YTD) and Oracle (+44% YTD) highlight how investment dollars continue to chase AI capability at every level—from data analysis to cloud infrastructure.

Rotation takeaway: AI is more than a trend—it’s a structural driver of the next wave of innovation. Tactical exposure allows portfolios to benefit from rapid adoption while managing position size and risk.

3. Semiconductors & Cybersecurity: 

“The backbone of digital growth”

We have seen 15%+ growth year-to-date in the broad technology sector, led by semiconductors and cybersecurity. Demand for high-performance chips is relentless, while cybersecurity has become indispensable to every industry.

Noteworthy leaders include SK Hynix (+74% YTD) and Micron (+45% YTD), both benefiting from AI-driven demand. The tech sector ETF (XLK) has gained nearly +15% YTD, showing broad strength across the category.

Rotation takeaway: Semiconductors and cybersecurity aren’t optional—they’re essential infrastructure. That makes them a natural part of a tactical growth strategy.

Rotation in Action: What a Shift Can Do

Sector rotation isn’t theoretical—it has a real impact on performance.

• The Energy sector has lagged in 2025, with the S&P Energy Index returning roughly –2% year-to-date.

• By contrast, shifting capital tactically into AI and Defense earlier this year would have captured +25% to +55% gains instead of absorbing a decline.

This example illustrates how rotating away from underperforming sectors into areas of strength can reduce volatility and enhance overall returns—without increasing risk exposure.

Why Industry Rotation Matters

By tactically reallocating between industries showing momentum—like defense, AI, and semiconductors—we can:

• Capture growth in sectors leading the market

• Reduce risk by avoiding over-concentration in lagging areas

• Smooth volatility through diversified exposure to multiple growth drivers

This approach helps balance opportunity with resilience, which is especially valuable in uncertain market environments.