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Sector ETFs

A combination of risk parity and relative strength can be used for tactical allocation for the basket of following sector ETFs

IYR, IYE, IYM, IYJ, IYC, IYW, IYK, IDU, IYG, IYH

We add to this basket the long term treasury fund VUSTX and at the beginning of every quarter:

  1. Select the nine assets whose performance was the best during the prior quarter.
  2. Use the variance matrix computed from the daily return data for the prior quarter to allocate weights on the basis of risk parity to each of the nine selected assets to be invested for the quarter.

Here are the results for the period 2001-2013 (8/6/2013):

CAGR 11.1%

Number of Years of Losses 2 (2001 -0.8%, 2008 -5.7%)

Sharpe Ratio 0.76

Sortino Ratio 1.35

Maximum Drawdown 16.3%

Number of drawdowns > 10% 1

According to Morningstar FundSelector (http://screen.morningstar.com/FundSelector.html ) there is only one Five Star mutual fund with average or better than average risk whose YTD, One Year, Three Year, Five Year and Ten Year returns are all better than the returns of this strategy (shown below):

 

Annualized Returns

YTD

12.0%

One Year

15.9%

Three Years

18.6%

Five Years

16.9%

Ten Years

12.9%

The equity curve and the allocation diagrams are shown in the following plots.

Disclosure: I am long IYR.