Simple Sector ETF Momentum Strategy

Posted in Momentum Investing

 

Do simple momentum trading strategies applied to major U.S. stock market sectors outperform reasonable benchmarks? To investigate, we apply three simple momentum strategies to the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR):

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)

The three strategies are: (1) allocate all funds at the end of each month to the sector ETF with the highest total return over the past six months (6-1); (2) allocate all funds at the end of each month to the sector ETF with the highest total return over the six months ending the prior month (6-1;1), hypothesizing that the skip-month avoids short-term reversals; and, (3) more cautiously, allocate all funds at the end of each month either to the sector ETF with the highest total return over the past six months or to cash depending on whether the S&P 500 Index is above or below its 10-month simple moving average (6-1;SMA10). A six-month ranking period is intuitively large enough to gauge sector momentum but small enough to react to changes in business conditions that might favor one sector over others. Using monthly dividend-adjusted closing prices for the sector ETFs, the S&P 500 index, 3-month Treasury bills (T-bills) and S&P Depository Receipts (SPY) over the period December 1998 through December 2013 (182 months), we find that: (more…)

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