The U.S. Sector strategy allocates dynamically between four long U.S. sector sub-strategies. Each of the four long sub-strategies use different momentum and mean reversion criteria

Due to the low correlation of these strategies, the combination creates a strategy with a considerably higher Sharpe Ratio than a simple sector rotation.

The strategy uses SPDR sector ETFs, but you can replace these with the corresponding sector ETFs or futures from other issuers.

US sectors have historically been good for trend following systems because each sector usually over or under performs for long periods at a time due to longer lasting economic cycles and not just short-term market fluctuations.

The economy itself is not a linear stable system, but swings between periods of expansion (growth) and contraction (recession). This results in a series of market cycles which are visualized in the following picture.

Source: http://www.nowandfutures.com (Global Business Cycles)

Each market cycle favors different industry sectors. The goal of a good working strategy is to choose the best performing sectors while avoiding or even shorting the worst performing sectors.

You can read the original strategy whitepaper for more details.

U.S. industry sectors ETFs, their corresponding inverse or short sector ETFs and optional futures:

U.S. Sector |
ETF |
Inverse (leverage) |
Globex Futures |

Materials | XLB | SMN (-2x) | IXB |

Energy | XLE | ERY (-3x) | IXEe |

Financial | XLF | SKF (-2x) | IXM |

Industrials | XLI | SIJ (-2x) | IXI |

Technology | XLK | REW (-2x) | IXT |

Consumer Staples | XLP | SZK (-2x) | IXR |

Real Estate | XLRE | SRS (-2x) | - |

Utilities | XLU | SDP (-2x) | IXU |

Health Care | XLV | RXD (-2x) | IXV |

Consumer Discretionary | XLY | SCC (-2x) | IXY |

'Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund). Total return is a strong measure of an investment’s overall performance.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (115.8%) in the period of the last 5 years, the total return, or performance of 40.1% of US Sector Rotation Strategy is smaller, thus worse.
- Compared with SPY (57%) in the period of the last 3 years, the total return, or increase in value of 20.8% is lower, thus worse.

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Using this definition on our asset we see for example:- Looking at the compounded annual growth rate (CAGR) of 7% in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (16.7%)
- During the last 3 years, the annual return (CAGR) is 6.5%, which is lower, thus worse than the value of 16.3% from the benchmark.

'In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Commonly, the higher the volatility, the riskier the security.'

Which means for our asset as example:- Looking at the volatility of 9.6% in the last 5 years of US Sector Rotation Strategy, we see it is relatively smaller, thus better in comparison to the benchmark SPY (18.8%)
- Looking at volatility in of 11.5% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (22.5%).

'Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Which means for our asset as example:- Compared with the benchmark SPY (13.7%) in the period of the last 5 years, the downside volatility of 6.9% of US Sector Rotation Strategy is lower, thus better.
- Looking at downside deviation in of 8.2% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (16.4%).

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Applying this definition to our asset in some examples:- The ratio of return and volatility (Sharpe) over 5 years of US Sector Rotation Strategy is 0.47, which is smaller, thus worse compared to the benchmark SPY (0.75) in the same period.
- During the last 3 years, the Sharpe Ratio is 0.35, which is smaller, thus worse than the value of 0.61 from the benchmark.

'The Sortino ratio improves upon the Sharpe ratio by isolating downside volatility from total volatility by dividing excess return by the downside deviation. The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative asset returns, called downside deviation. The Sortino ratio takes the asset's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation. The ratio was named after Frank A. Sortino.'

Which means for our asset as example:- The downside risk / excess return profile over 5 years of US Sector Rotation Strategy is 0.65, which is lower, thus worse compared to the benchmark SPY (1.04) in the same period.
- During the last 3 years, the downside risk / excess return profile is 0.49, which is lower, thus worse than the value of 0.84 from the benchmark.

'The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987, and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period. Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn't mind upward movement, it's the downside that causes stress and stomach ulcers that the index's name suggests.'

Which means for our asset as example:- Compared with the benchmark SPY (5.58 ) in the period of the last 5 years, the Downside risk index of 3.21 of US Sector Rotation Strategy is smaller, thus better.
- Compared with SPY (6.83 ) in the period of the last 3 years, the Downside risk index of 3.77 is smaller, thus better.

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Which means for our asset as example:- The maximum DrawDown over 5 years of US Sector Rotation Strategy is -18.5 days, which is higher, thus better compared to the benchmark SPY (-33.7 days) in the same period.
- During the last 3 years, the maximum reduction from previous high is -18.5 days, which is larger, thus better than the value of -33.7 days from the benchmark.

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs) in days.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (139 days) in the period of the last 5 years, the maximum days below previous high of 332 days of US Sector Rotation Strategy is larger, thus worse.
- Looking at maximum days under water in of 332 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (139 days).

'The Average Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Using this definition on our asset we see for example:- The average days under water over 5 years of US Sector Rotation Strategy is 76 days, which is greater, thus worse compared to the benchmark SPY (33 days) in the same period.
- Compared with SPY (35 days) in the period of the last 3 years, the average days under water of 89 days is larger, thus worse.

Historical returns have been extended using synthetic data.
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- Note that yearly returns do not equal the sum of monthly returns due to compounding.
- Performance results of US Sector Rotation Strategy are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.