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, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Applying this definition to our asset in some examples:- The total return, or increase in value over 5 years of US Sector Rotation Strategy is 109.1%, which is larger, thus better compared to the benchmark SPY (102%) in the same period.
- Compared with SPY (31.5%) in the period of the last 3 years, the total return of 37.5% is higher, thus better.

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Which means for our asset as example:- The annual return (CAGR) over 5 years of US Sector Rotation Strategy is 15.9%, which is higher, thus better compared to the benchmark SPY (15.1%) in the same period.
- During the last 3 years, the compounded annual growth rate (CAGR) is 11.2%, which is larger, thus better than the value of 9.6% 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:- The historical 30 days volatility over 5 years of US Sector Rotation Strategy is 12.8%, which is lower, thus better compared to the benchmark SPY (20.9%) in the same period.
- Compared with SPY (17.6%) in the period of the last 3 years, the volatility of 12.6% is lower, thus better.

'The downside volatility is similar to the volatility, or standard deviation, but only takes losing/negative periods into account.'

Which means for our asset as example:- Compared with the benchmark SPY (14.9%) in the period of the last 5 years, the downside risk of 9.2% of US Sector Rotation Strategy is lower, thus better.
- Compared with SPY (12.4%) in the period of the last 3 years, the downside volatility of 9.1% is smaller, thus better.

'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.'

Using this definition on our asset we see for example:- The ratio of return and volatility (Sharpe) over 5 years of US Sector Rotation Strategy is 1.05, which is greater, thus better compared to the benchmark SPY (0.6) in the same period.
- During the last 3 years, the risk / return profile (Sharpe) is 0.69, which is greater, thus better than the value of 0.4 from the benchmark.

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Applying this definition to our asset in some examples:- The downside risk / excess return profile over 5 years of US Sector Rotation Strategy is 1.46, which is greater, thus better compared to the benchmark SPY (0.84) in the same period.
- Looking at ratio of annual return and downside deviation in of 0.96 in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (0.57).

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Which means for our asset as example:- Looking at the Downside risk index of 6.01 in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (9.32 )
- During the last 3 years, the Ulcer Ratio is 7.32 , which is lower, thus better than the value of 10 from the benchmark.

'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.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (-33.7 days) in the period of the last 5 years, the maximum drop from peak to valley of -16.4 days of US Sector Rotation Strategy is higher, thus better.
- Compared with SPY (-24.5 days) in the period of the last 3 years, the maximum drop from peak to valley of -16.4 days is greater, thus better.

'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.'

Applying this definition to our asset in some examples:- Looking at the maximum time in days below previous high water mark of 507 days in the last 5 years of US Sector Rotation Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (488 days)
- During the last 3 years, the maximum days below previous high is 507 days, which is higher, thus worse than the value of 488 days from the benchmark.

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. 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.'

Applying this definition to our asset in some examples:- The average days under water over 5 years of US Sector Rotation Strategy is 131 days, which is greater, thus worse compared to the benchmark SPY (123 days) in the same period.
- During the last 3 years, the average time in days below previous high water mark is 191 days, which is higher, thus worse than the value of 177 days from the benchmark.

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 and do not account for slippage, fees or taxes.
- Results may be based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.