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 |

'The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This contrasts with the price return, which takes into account only the capital gain on an investment.'

Which means for our asset as example:- Looking at the total return of 134.9% in the last 5 years of US Sector Rotation Strategy, we see it is relatively higher, thus better in comparison to the benchmark SPY (61.9%)
- Compared with SPY (79.4%) in the period of the last 3 years, the total return of 79.4% is larger, thus better.

'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.'

Applying this definition to our asset in some examples:- The compounded annual growth rate (CAGR) over 5 years of US Sector Rotation Strategy is 18.7%, which is greater, thus better compared to the benchmark SPY (10.1%) in the same period.
- Compared with SPY (21.5%) in the period of the last 3 years, the annual return (CAGR) of 21.5% is higher, thus better.

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Applying this definition to our asset in some examples:- The 30 days standard deviation over 5 years of US Sector Rotation Strategy is 12.8%, which is smaller, thus better compared to the benchmark SPY (21.5%) in the same period.
- Looking at historical 30 days volatility in of 14.4% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (21.2%).

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

Using this definition on our asset we see for example:- Compared with the benchmark SPY (15.5%) in the period of the last 5 years, the downside risk of 9.2% of US Sector Rotation Strategy is lower, thus better.
- During the last 3 years, the downside risk is 10.2%, which is lower, thus better than the value of 14.1% from the benchmark.

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (0.36) in the period of the last 5 years, the ratio of return and volatility (Sharpe) of 1.26 of US Sector Rotation Strategy is higher, thus better.
- During the last 3 years, the risk / return profile (Sharpe) is 1.32, which is higher, thus better than the value of 0.9 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.'

Which means for our asset as example:- The downside risk / excess return profile over 5 years of US Sector Rotation Strategy is 1.76, which is larger, thus better compared to the benchmark SPY (0.49) in the same period.
- Compared with SPY (1.35) in the period of the last 3 years, the excess return divided by the downside deviation of 1.87 is higher, thus better.

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Which means for our asset as example:- Looking at the Ulcer Index of 4.59 in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (9.15 )
- During the last 3 years, the Ulcer Index is 5.48 , which is smaller, thus better than the value of 9.78 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.'

Applying this definition to our asset in some examples:- Looking at the maximum reduction from previous high of -16.4 days in the last 5 years of US Sector Rotation Strategy, we see it is relatively higher, thus better in comparison to the benchmark SPY (-33.7 days)
- During the last 3 years, the maximum reduction from previous high is -16.4 days, which is greater, thus better than the value of -24.5 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). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

Using this definition on our asset we see for example:- Looking at the maximum time in days below previous high water mark of 197 days in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (305 days)
- Looking at maximum days under water in of 197 days in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (305 days).

'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.'

Which means for our asset as example:- Looking at the average time in days below previous high water mark of 34 days in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (65 days)
- Compared with SPY (80 days) in the period of the last 3 years, the average days below previous high of 46 days is lower, thus better.

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.