Sector Rotation and ETF Strategy in a Volatile December 2025 Market

As December 2025 unfolds, investors face a complex market environment shaped by divergent sector performances and weakening macroeconomic signals. The Conference Board Leading Economic Index (LEI), a critical barometer of economic health, declined by 0.3% in September 2025 to 98.3, marking its sixth consecutive monthly contraction and a 2.1% drop since March 2025 according to data. This trend underscores a slowdown in economic activity, with consumer and business expectations, the ISM New Orders Index, and manufacturing orders contributing to the decline as reported. Against this backdrop, sector rotation strategies must prioritize defensive and industrially driven ETFs while hedging against overextended growth sectors.

Leveraging Leading Sectors: Health Care (XLV) and Industrials (XLI)

.The Health Care Select Sector SPDR Fund (XLV) has maintained its dominance in relative strength rankings, reflecting its resilience amid macroeconomic uncertainty. As of December 2025, XLV closed at $150.33, with a 0.24% gain on December 10, signaling sustained investor confidence in its defensive characteristics according to analysis. This aligns with historical patterns where healthcare sectors outperform during economic contractions, driven by inelastic demand for medical services and innovation in biotechnology as indicated.

Meanwhile, the Industrial Select Sector SPDR Fund (XLI) has emerged as a standout performer, surging 18.2% year-to-date through November 2025-well above the S&P 500's 9.5% return. Key holdings like General Electric (GE) and GE Vernova Inc. (GEV) have propelled this growth, with GE Aerospace and energy-focused subsidiaries benefiting from heightened defense spending and infrastructure investments as detailed. Technically, XLI broke above its lower Bollinger Band in late November, and its RSI oscillator suggests a potential shift to an upward trend according to technical analysis. For December, XLI added 0.44% on December 10, closing at $153.94, reinforcing its appeal as a cyclical play in a fragile economic environment according to market data.

Defensive Positioning: Utilities (XLU) and Strategic Caution

The Utilities Select Sector SPDR Fund (XLU) presents a mixed picture. While it closed at $42.79 on December 10 with a modest 0.09% gain according to reports, its weekly chart indicates approaching key support levels, raising concerns about short-term volatility as shown. Utilities typically thrive in low-rate environments, and with the Federal Reserve anticipated to cut rates in December 2025 according to forecasts, XLU could benefit from reduced financing costs for capital-intensive projects. However, investors should approach XLU cautiously, balancing its defensive allure with technical vulnerabilities.

Hedging Against Overextended Sectors: Technology (XLK) and Communication Services (XLC)

In contrast, the Technology Select Sector SPDR Fund (XLK) and Communication Services Select Sector SPDR Fund (XLC) face headwinds. XLK, which had been a growth darling with a 24.51% year-to-date return through November 7 according to performance data, closed December 10 at $147.82-a 0.14% decline-while XLC fell 0.13% to $116.24 according to market analysis. These dips reflect profit-taking after a strong rally and growing concerns about valuation sustainability. Despite a lower PEG ratio (1.57) compared to the S&P 500 (1.74) as reported, XLK's short-term momentum has stalled, making it a prime candidate for hedging. Similarly, XLC's 16.83% gain through November 7 according to historical returns has plateaued, with macroeconomic pressures dampening demand for discretionary tech services.

Strategic Implications for December 2025

The weakening LEI and projected GDP slowdown to 1.5% in 2026 suggest a shift toward defensive and industrially focused allocations. Investors should consider overweighting XLV and XLI while reducing exposure to XLK and XLC. For utilities, a tactical, time-sensitive approach may be warranted, leveraging anticipated rate cuts without overcommitting to XLU's near-term volatility.

Moreover, sector rotation must remain dynamic. The Conference Board's warning of uneven growth and tariff adjustments highlights the need for agility. Defensive sectors like healthcare and industrials offer ballast, while monitoring leading indicators-such as the LEI and Fed policy-can provide early signals for further rotations.

Conclusion

December 2025 demands a disciplined, data-driven approach to sector rotation. By capitalizing on the outperformance of XLV and XLI, hedging against overextended tech and communication services ETFs, and maintaining a watchful eye on macroeconomic signals, investors can navigate volatility while positioning for potential rebounds in early 2026.