Description

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.

Methodology & Assets

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

Statistics (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (81.5%) in the period of the last 5 years, the total return of 153.8% of US Sector Rotation Strategy is larger, thus better.
  • Looking at total return, or performance in of 85.2% in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (48.1%).

CAGR:

'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 compounded annual growth rate (CAGR) over 5 years of US Sector Rotation Strategy is 20.5%, which is higher, thus better compared to the benchmark SPY (12.7%) in the same period.
  • Looking at compounded annual growth rate (CAGR) in of 22.8% in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (14%).

Volatility:

'Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.'

Using this definition on our asset we see for example:
  • The historical 30 days volatility over 5 years of US Sector Rotation Strategy is 12.1%, which is lower, thus better compared to the benchmark SPY (20.5%) in the same period.
  • During the last 3 years, the volatility is 14%, which is lower, thus better than the value of 23.8% from the benchmark.

DownVol:

'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:
  • The downside deviation over 5 years of US Sector Rotation Strategy is 8.7%, which is lower, thus better compared to the benchmark SPY (15%) in the same period.
  • Looking at downside risk in of 10.1% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (17.3%).

Sharpe:

'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.'

Which means for our asset as example:
  • Looking at the risk / return profile (Sharpe) of 1.49 in the last 5 years of US Sector Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.5)
  • Looking at ratio of return and volatility (Sharpe) in of 1.46 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (0.48).

Sortino:

'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:
  • Looking at the downside risk / excess return profile of 2.08 in the last 5 years of US Sector Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.68)
  • During the last 3 years, the downside risk / excess return profile is 2.01, which is greater, thus better than the value of 0.66 from the benchmark.

Ulcer:

'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:
  • The Downside risk index over 5 years of US Sector Rotation Strategy is 3.2 , which is smaller, thus better compared to the benchmark SPY (7.13 ) in the same period.
  • Compared with SPY (8.25 ) in the period of the last 3 years, the Ulcer Index of 3.88 is lower, thus better.

MaxDD:

'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:
  • Looking at the maximum DrawDown of -15 days in the last 5 years of US Sector Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (-33.7 days)
  • Looking at maximum DrawDown in of -15 days in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (-33.7 days).

MaxDuration:

'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.'

Which means for our asset as example:
  • Looking at the maximum time in days below previous high water mark of 104 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 (150 days)
  • Looking at maximum time in days below previous high water mark in of 104 days in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (150 days).

AveDuration:

'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 time in days below previous high water mark over 5 years of US Sector Rotation Strategy is 22 days, which is smaller, thus better compared to the benchmark SPY (41 days) in the same period.
  • During the last 3 years, the average days under water is 22 days, which is smaller, thus better than the value of 36 days from the benchmark.

Performance (YTD)

Historical returns have been extended using synthetic data.

Allocations ()

Allocations

Returns (%)

  • 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.