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:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Applying this definition to our asset in some examples:
  • Looking at the total return of 67.3% in the last 5 years of US Sector Rotation Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (119%)
  • Looking at total return in of 13% in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (63.7%).

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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (17%) in the period of the last 5 years, the annual return (CAGR) of 10.9% of US Sector Rotation Strategy is lower, thus worse.
  • During the last 3 years, the annual return (CAGR) is 4.2%, which is smaller, thus worse than the value of 17.9% from the benchmark.

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:
  • Compared with the benchmark SPY (17.6%) in the period of the last 5 years, the historical 30 days volatility of 12.1% of US Sector Rotation Strategy is lower, thus better.
  • Compared with SPY (17.5%) in the period of the last 3 years, the 30 days standard deviation of 10.5% is lower, thus better.

DownVol:

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

Which means for our asset as 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 (12.1%) in the same period.
  • Looking at downside volatility in of 7.5% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (11.6%).

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:
  • The ratio of return and volatility (Sharpe) over 5 years of US Sector Rotation Strategy is 0.69, which is lower, thus worse compared to the benchmark SPY (0.83) in the same period.
  • During the last 3 years, the risk / return profile (Sharpe) is 0.16, which is lower, thus worse than the value of 0.88 from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (1.2) in the period of the last 5 years, the excess return divided by the downside deviation of 0.96 of US Sector Rotation Strategy is lower, thus worse.
  • Compared with SPY (1.33) in the period of the last 3 years, the downside risk / excess return profile of 0.22 is lower, thus worse.

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.'

Using this definition on our asset we see for example:
  • The Ulcer Ratio over 5 years of US Sector Rotation Strategy is 6.35 , which is lower, thus better compared to the benchmark SPY (8.48 ) in the same period.
  • During the last 3 years, the Ulcer Index is 4.7 , which is lower, thus better than the value of 5.31 from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • 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 greater, thus better.
  • Compared with SPY (-18.8 days) in the period of the last 3 years, the maximum DrawDown of -11.7 days is larger, thus better.

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.'

Using this definition on our asset we see for example:
  • The maximum time in days below previous high water mark over 5 years of US Sector Rotation Strategy is 507 days, which is larger, thus worse compared to the benchmark SPY (488 days) in the same period.
  • Compared with SPY (199 days) in the period of the last 3 years, the maximum days below previous high of 268 days is higher, thus worse.

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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (120 days) in the period of the last 5 years, the average days under water of 140 days of US Sector Rotation Strategy is larger, thus worse.
  • During the last 3 years, the average days under water is 84 days, which is larger, thus worse than the value of 47 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 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.