- The AlphaDEX ETFs are strategy ETFs combining price momentum and valuation in each sector.
- A previous article shows that they outperform sector benchmarks in defensive sectors.
- Their strategy has also provided an alpha in Financials and Materials since inception date, but results are deceptive in other cyclical sectors.
The first article of this series (click here to read) introduced the AlphaDEX ETFs. They implement a quantitative strategy in every sector. Each Russell 1000 stock is given a score based either on price momentum (if it is classified as a growth stock) or on fundamental ratios (if it is classified as a value stock). In each sector, the bottom 25% is eliminated and the rest is given a rank and a weight based on the score. A second article (here) has shown that the AlphaDEX ETFs outperformed the Select Sector SPDR ETFs in defensive sectors. This third article focuses on the AlphaDEX ETFs in cyclical sectors: Energy (NYSEARCA:FXN), Financials (NYSEARCA:FXO), Industrials (NYSEARCA:FXR), Technology (NYSEARCA:FXL), Materials (NYSEARCA:FXZ). The corresponding SPDR funds used as benchmarks are respectively XLE, XLF, XLI, XLK, XLB.
My aim is to evaluate sector by sector the AlphaDEX ETFs by comparing their returns, volatilities, and risk-adjusted performance with their benchmarks since their inception.
The next table compares the AlphaDEX Funds with the iShares Russell 1000 ETF (NYSEARCA:IWB) and the appropriate Select Sector SPDR Funds from 5/10/2007 to 4/18/2014.
Dividends are reinvested. Statistics are calculated using OHLC price data (the maximum drawdown is an intraday value).
On this period, Energy and Financials have lagged the Russell 1000 whereas the other cyclical sectors have outperformed. For Financials and Basic Materials, the AlphaDEX ETFs have a better return and risk-adjusted performance than their benchmarks. In other cyclical sectors, the alpha was negative and the risk systematically higher, in terms of drawdown and volatility.
To summarize the three articles, here is the list of the "good" AlphaDEX ETFs (with a positive alpha over their Sector SPDR benchmarks), and their annualized alpha since inception: Financials (FXO, 7.9%), Health Care (FXH, 4.8%), Materials (FXZ, 3.2%), Utilities (FXU, 1.1%), and Consumer Staples (FXG, 0.3%). The "bad" ones are Energy (FXN, -3%), Consumer Discretionary (FXD, -2%), Technology (FXL, -1.2%), and Industrials (FXR, -1.2%).
The conclusion is that on a 7-year period covering all market conditions, the AlphaDEX ETFs have very different performances relatively to their benchmarks depending on the sector. Combining a set of fundamental factors with price momentum is smart, but a single set of rules doesn't fit all sectors.