Wednesday, January 16, 2013

Simple Sector ETF Momentum Strategy

Just read a post on CXO Advisory (full post available to subscribers only):

Which tested a number of simple strategies to switch among different sector ETFs:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

What they found echoes our research.  It is relatively easy to create a sector momentum strategy that beats the market but not by enough to really make it compelling, especially since there are many other momentum based strategies that do much better than sector momentum.  Here is their summary:

In summary, evidence from a limited sample period suggests that a simple sector ETF momentum strategy fares well compared to the overall stock market and adds some value to a simple (equal-weighted) diversification approach, but this added value may be dissipating.


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