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 investmentâ€™s overall performance.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (77.7%) in the period of the last 5 years, the total return of 69.5% of US Sector Rotation Strategy is lower, thus worse.
- Compared with SPY (52.3%) in the period of the last 3 years, the total return, or performance of 39.1% is smaller, thus worse.

'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.'

Which means for our asset as example:- Looking at the annual performance (CAGR) of 11.1% in the last 5 years of US Sector Rotation Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (12.2%)
- Compared with SPY (15.1%) in the period of the last 3 years, the annual performance (CAGR) of 11.7% is smaller, thus worse.

'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.'

Applying this definition to our asset in some examples:- Looking at the volatility of 6.3% in the last 5 years of US Sector Rotation Strategy, we see it is relatively lower, thus better in comparison to the benchmark SPY (13.3%)
- Looking at volatility in of 5.9% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (13%).

'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 (9.6%) in the period of the last 5 years, the downside volatility of 4.2% of US Sector Rotation Strategy is lower, thus better.
- Looking at downside volatility in of 3.9% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (9.4%).

'The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William F. Sharpe.'

Applying this definition to our asset in some examples:- Looking at the Sharpe Ratio of 1.37 in the last 5 years of US Sector Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.73)
- Looking at Sharpe Ratio in of 1.57 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (0.97).

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

Using this definition on our asset we see for example:- Looking at the downside risk / excess return profile of 2.06 in the last 5 years of US Sector Rotation Strategy, we see it is relatively larger, thus better in comparison to the benchmark SPY (1.01)
- Looking at ratio of annual return and downside deviation in of 2.35 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (1.34).

'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:- Compared with the benchmark SPY (3.97 ) in the period of the last 5 years, the Downside risk index of 1.72 of US Sector Rotation Strategy is lower, thus better.
- During the last 3 years, the Ulcer Index is 1.31 , which is lower, thus better than the value of 4.1 from the benchmark.

'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:- The maximum reduction from previous high over 5 years of US Sector Rotation Strategy is -5.3 days, which is greater, thus better compared to the benchmark SPY (-19.3 days) in the same period.
- Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum reduction from previous high of -5.3 days is larger, 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:- Compared with the benchmark SPY (187 days) in the period of the last 5 years, the maximum days below previous high of 173 days of US Sector Rotation Strategy is smaller, thus better.
- During the last 3 years, the maximum days under water is 101 days, which is lower, thus better than the value of 139 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.'

Which means for our asset as example:- Looking at the average time in days below previous high water mark of 35 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 (42 days)
- During the last 3 years, the average days under water is 22 days, which is lower, thus better than the value of 37 days from the benchmark.

Historical returns have been extended using synthetic data.
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Allocations and holdings shown below are delayed by one month. To see current trading allocations of US Sector Rotation Strategy, register now.

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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.