Sector Momentum Rotation Using Three Leading ETFs

Summary

This document describes a monthly sector rotation rule using ten sector ETFs. Each month, rank the funds by their prior 12-month returns, invest equally in the three strongest, hold for one month, and then rebalance. The stated aim is to outperform a broad equity index by concentrating in sectors with stronger recent performance. It also notes a possible long-short variant that pairs leading sectors with a short position in a market index or weaker sectors, while saying the long-only version is the one presented as the basic rule.

The rationale is that sector returns may respond differently to business cycles and that industry momentum can help explain stock momentum. The cited research discusses sector and industry momentum, including tests using sector indexes and tradable ETFs; one cited study reports excess returns after costs over its ETF sample. The document does not provide a complete backtest for the specific three-ETF rule, and warns that the proposed hedge variant needs rigorous testing. Results may depend on the sample, implementation costs, and momentum risk.

Key ideas

• Rank ten sector ETFs by their trailing 12-month returns and select the three leaders.
• Weight the selected ETFs equally, hold them for one month, and rebalance monthly.
• The strategy combines sector rotation with relative momentum and is intended to beat a broad equity index.
• Research cited in the document reports momentum patterns in industry and sector portfolios, including tradable ETFs.
• The proposed long-short hedge variant is not fully evaluated and requires further testing.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.