Update: U.S. Sector Rotation Strategy August 2018
Rules-Based Strategy Update: U.S. Sector Rotation Strategy August 2018
U.S. Sector rotation strategies get a lot of airplay on the internet. The concept sounds valid and it is easy to implement. That is why I wanted to use Robotic Investing to test the strategy to see how it performs.
As a reminder, the U.S. Sector Rotation strategy buys the top three performing U.S. sectors based on the prior 3-month performance. It is based off a strategy outlined in a paper by Meb Faber.
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U.S. Sector Rotation Strategy Rules-Based Investing
The U.S. Sector Rotation portfolio trades based on specific rules that tell the investor what sectors to hold each month. Here are the rules of the strategy:
- Trades the nine Sector SPDR ETFs.
- On the last trading day of each month, calculate the prior 3-month (63 trading days) return for each ETF using historical adjusted closing prices.
- Sort the ETFs from highest 3-month return to lowest 3-month return. The ETF with the best 3-month return has the strongest momentum.
- Buy Rules: If the S&P 500 index is trading above its 10-month (200 day) moving average, then buy the three sector ETFs with the highest 3-month return.
- Sell Rules: If the S&P 500 is trading below its 10-month (200 day) moving average, then sell all three ETFs and move to cash.
- Rebalance: At the end of each month, if the S&P 500 index is trading above its 10-month (200 day) moving average, sell the sector ETF(s) that have moved out of the top three, and replace with the sector ETF(s) that are now in the top 3.
This is one of the simpler systems to use and trade.
Monthly Signals: U.S. Sector Rotation Investing
Each month I generate the signals for the portfolio using TC2000. If you want to give TC2000 a try in order to generate the signals for the strategies on Robotic Investing, then use this link for $25 off.
There was a change to the portfolio for August 2018 – the system sold XLE and bought XLV.
One of the rules is that the S&P 500 must be trading above its 10-month moving average in order to make any buys. The S&P 500 is above that level so the system is free to trade.
Using TC2000 to determine the top 3 ETFs to trade, we can see that this month’s holdings should be XLK, XLV, and XLY.
Strategy Tracking & Performance: U.S. Sector Rotation Investing
Here is the portfolio tracker and performance chart for Stocks on the Move. I use the Morningstar Portfolio Tracker to track all the systems at Robotic Investing. As you can see the strategy lagged the S&P500 a bit over the month, but let’s give it more time to see how it really does.
Each of the portfolios tracked use a hypothetical $50,000 starting value. This portfolio was started on July 2nd, 2018.
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