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.'

Which means for our asset as example:- Compared with the benchmark SPY (57.1%) in the period of the last 5 years, the total return, or increase in value of 126.6% of US Sector Rotation Strategy is larger, thus better.
- Compared with SPY (32%) in the period of the last 3 years, the total return of 35.7% 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 17.8%, which is larger, thus better compared to the benchmark SPY (9.5%) in the same period.
- During the last 3 years, the annual return (CAGR) is 10.7%, which is higher, thus better than the value of 9.7% 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.'

Applying this definition to our asset in some examples:- The volatility over 5 years of US Sector Rotation Strategy is 12.9%, which is lower, thus better compared to the benchmark SPY (21.5%) in the same period.
- Compared with SPY (17.9%) in the period of the last 3 years, the 30 days standard deviation of 13.4% is lower, thus better.

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

Applying this definition to our asset in some examples:- Looking at the downside deviation of 9.2% in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (15.5%)
- Looking at downside deviation in of 9.7% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (12.5%).

'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:- The risk / return profile (Sharpe) over 5 years of US Sector Rotation Strategy is 1.19, which is larger, thus better compared to the benchmark SPY (0.32) in the same period.
- Looking at risk / return profile (Sharpe) in of 0.61 in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (0.41).

'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:- Compared with the benchmark SPY (0.45) in the period of the last 5 years, the excess return divided by the downside deviation of 1.66 of US Sector Rotation Strategy is larger, thus better.
- Looking at ratio of annual return and downside deviation in of 0.85 in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (0.58).

'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:- The Downside risk index over 5 years of US Sector Rotation Strategy is 5.52 , which is smaller, thus better compared to the benchmark SPY (9.57 ) in the same period.
- Compared with SPY (10 ) in the period of the last 3 years, the Downside risk index of 6.72 is smaller, thus better.

'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.'

Applying this definition to our asset in some examples:- The maximum reduction from previous high over 5 years of US Sector Rotation Strategy is -16.4 days, which is larger, thus better compared to the benchmark SPY (-33.7 days) in the same period.
- During the last 3 years, the maximum drop from peak to valley is -16.4 days, which is higher, 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'

Applying this definition to our asset in some examples:- The maximum time in days below previous high water mark over 5 years of US Sector Rotation Strategy is 331 days, which is lower, thus better compared to the benchmark SPY (439 days) in the same period.
- Looking at maximum days under water in of 331 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (439 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 66 days, which is lower, thus better compared to the benchmark SPY (106 days) in the same period.
- Compared with SPY (149 days) in the period of the last 3 years, the average days below previous high of 94 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.