Alternative Sector ETF Momentum Metrics

Posted in Momentum Investing

 

Readers have suggested three alternative metrics for the strategy tested in the “Simple Sector ETF Momentum Strategy Performance”: (1) Sharpe Ratio over the past six months; (2) slope of price over the past six months; and, (3) average of three-month, six-month and 12-month past returns. Do these metrics outperform past six-month return in a momentum strategy applied to the following nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:

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 alternative strategies are, at the end of each month, allocate all funds to the sector ETF with the highest: (1) monthly Sharpe Ratio over the past six months (SR6-1); (2) monthly price slope over the past six months (Slope6-1); and, (3) average of past three-month, six-month and 12-month past total returns (3-1;6-1;12-1). For comparison, we include the strategy of monthly allocation to the sector ETF with the highest total return over the past six months (6-1). Using monthly dividend-adjusted closing prices for the nine sector ETFs¬†over the period December 1998 through December 2013 (182 months), we find that: (more…)

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