This Sector Rotation Strategy Made 17% Each Year Since 1991

Dec. 14, 2020 2:07 PM ETXLB, XLC, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY53 Comments
Francois Soto, CFA profile picture
Francois Soto, CFA


  • 30-year strategy backtest using GICS Sectors' Total Return Indices.
  • Invests in the top one to three ETFs out of ten Select Sector SPDR ETFs.
  • Relies on a macro business cycle concept validated as far as the 1960s.
  • Considers the easing and tightening effects of the U.S. monetary policy.

With all those discussions on the great sector rotation to cyclicals, I thought it would be a good idea to update a sector rotation strategy I created eight years ago. To my surprise, the strategy is still producing excellent results. I will start by showcasing the performance statistics as an incentive for you to read. I will then explain the step-by-step thought process to build the strategy.

Sector Rotation Strategy - 0Source: Jayson Delos Santos & Pexels

In a nutshell, some sectors perform better than others, depending on where we are on the business cycle. As Mark Twain once said, history doesn't repeat itself, but it often rhymes. I observed slight variations between each business cycle due to their uniqueness while studying those cycles. However, it seems as if a common denominator prevails, as I will demonstrate below.

The Sector Rotation Strategy

This strategy invests in the top one to three ETFs out of ten Select Sector SPDR ETFs and is rebalanced monthly. Transactions are recorded with the last closing price of the month. It is completely unlevered. It invests equally in each sector when there is more than one. The backtest of the strategy since 1991 is impressive compared to either the S&P 500 Total Return Index or a custom benchmark that invests equally in each of the ten sectors.Source: Factor-Based

The ten Select Sector SPDR ETFs are:

XLF: Financials

XLE: Energy

XLB: Materials

XLI: Industrials

XLY: Discretionary

XLP: Staples

XLU: Utilities

XLK: Info Tech

XLV: Health Care

XLC: Telecom

The backtest uses the S&P GICS Sectors' Total Return Indices instead of the ETFs because they didn't exist in 1991. The inception of those ETFs was in 1998. It also makes sense to compare the sector rotation strategy gross of fees because I am benching against the S&P 500 Total Return Index. If

This article was written by

Francois Soto, CFA profile picture
François Soto is Factor-Based Asset Management’s President and Portfolio Manager. He is leading the investment process for various model portfolio strategies while also overseeing equity research. Before creating the firm, François accumulated 15 years of experience working for various financial institutions. François holds a MBA degree specializing in Finance from HEC Montreal (2011) and is a CFA charterholder (2016), a FRM charterholder (2010) and a CIM charterholder (2010).

Disclosure: I am/we are long XLF, XLE, XLI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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