What about using a simple sector rotation scheme to substitute for SP-500 exposure? The first plot above shows a comparison of such a scheme compared with SPY. The sector rotation did much better during the down market of 2000 to 2002 and did better during the up market of 2003 to 2007.
The results shown are based on the relative strength of the nine Select Sector SPDRs (XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY). The bottom three sectors based on 30 day relative strength are purchased and held for 30 days. The results for the top three sectors are much worse in the down market of 2000 to 2002 and a not quite as good as the bottom sectors in the up market of 2003 to 2007.
The relative strength approach is sensitive to the start time of the testing. The second plot above shows the results for the sector rotation with different starting times. All of the starting times produced better results than just holding SPY.
Sector rotation looks promising as a way to increase a portfolio's return without taking on much additional risk. Additional investigation is necessary. For example, most of the transaction costs can be eliminated if we use a single mutual fund or ETF. The Claymore/Zacks Sector Rotation ETF (XRO) and the Rydex Sector Rotation Fund (RYSRX) are available. XRO only has one year of data available and RYSRX only has data from 2002 so we cannot tell if they would have held up as well as the bottom three SPDRs scheme in a significant down market.
I will continue to investigate and provide additional updates on sector rotation in the future. Does anyone know of other sector rotation ETFs or mutual funds?
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