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.'

Applying this definition to our asset in some examples:
  • Looking at the total return of 102.4% in the last 5 years of US Sector Rotation Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (154.3%)
  • Looking at total return, or performance in of 13.3% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (32.9%).

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.'

Using this definition on our asset we see for example:
  • Looking at the compounded annual growth rate (CAGR) of 15.2% in the last 5 years of US Sector Rotation Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (20.6%)
  • Looking at annual return (CAGR) in of 4.3% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (10%).

Volatility:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the 30 days standard deviation of 12.3% in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (18.4%)
  • During the last 3 years, the volatility is 12.2%, which is smaller, thus better than the value of 17% from the benchmark.

DownVol:

'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:
  • Looking at the downside deviation of 8.7% in the last 5 years of US Sector Rotation Strategy, we see it is relatively smaller, thus better in comparison to the benchmark SPY (12.4%)
  • Compared with SPY (12%) in the period of the last 3 years, the downside deviation of 9% is lower, thus better.

Sharpe:

'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:
  • Looking at the Sharpe Ratio of 1.03 in the last 5 years of US Sector Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.99)
  • Looking at Sharpe Ratio in of 0.15 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (0.44).

Sortino:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the excess return divided by the downside deviation of 1.46 in the last 5 years of US Sector Rotation Strategy, we see it is relatively higher, thus better in comparison to the benchmark SPY (1.46)
  • Compared with SPY (0.62) in the period of the last 3 years, the excess return divided by the downside deviation of 0.2 is lower, thus worse.

Ulcer:

'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.'

Using this definition on our asset we see for example:
  • Looking at the Ulcer Ratio of 6.06 in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (8.29 )
  • Compared with SPY (8.63 ) in the period of the last 3 years, the Ulcer Index of 7.63 is smaller, thus better.

MaxDD:

'A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown is an indicator of downside risk over a specified time period. It can be used both as a stand-alone measure or as an input into other metrics such as 'Return over Maximum Drawdown' and the Calmar Ratio. Maximum Drawdown is expressed in percentage terms.'

Which means for our asset as example:
  • Compared with the benchmark SPY (-24.5 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.
  • During the last 3 years, the maximum DrawDown is -16.4 days, which is higher, thus better than the value of -22.1 days from the benchmark.

MaxDuration:

'The Maximum 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. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Which means for our asset as example:
  • 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)
  • Looking at maximum days under water in of 507 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (325 days).

AveDuration:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the average time in days below previous high water mark of 133 days in the last 5 years of US Sector Rotation Strategy, we see it is relatively greater, thus worse in comparison to the benchmark SPY (119 days)
  • Looking at average days below previous high in of 192 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (89 days).

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 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.