UBS names the best sectors from its quant model: Sector Watch

Dec. 05, 2021 11:50 AM ETEnergy Select Sector SPDR ETF (XLE), XLB, XLRE, XLYSPY, XLU, IWV, XLV, XLF, XLI, XLK, XLP, XLC, SP500By: Kim Khan, SA News Editor5 Comments

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  • The UBS sector rotational quant model has eight broader market sectors Overweight and three Underweight.
  • Energy (NYSEARCA:XLE) is at the top of Overweight with a 20% allocation, while Healthcare (NYSEARCA:XLV) has the biggest Underweight at about 65%.
  • "Our sector rotation model uses our Delta Quality, Free Cashflow Yield and Composite Momentum to rank individual securities. We then utilize the implied sector tilts to generate our sector allocations," UBS analyst Paul Winter and team write in a note.
  • The factors start with "a standard score for Delta Quality, Free Cash Flow Yield and Composite momentum for the Russell 3000 (NYSEARCA:IWV)." Then UBS splits the scores into thirds each month and calculate the sector weight for the top third and bottom third.
  • They then "subtract the sector weights from the top third minus bottom third to arrive at an implied sector bet." UBS then rescales the sector long/short percentages, so the model weights are 100% positive and 100% negative.
  • "We note that there are some sectors that the model seems to permanently underweight such as Energy, Health Care, Financials and Real Estate. In most cases this is due the low free Cashflow yields of these sectors. In some cases, such as Health Care, investors may wish to overwrite the model given the structural driver of an aging population globally."
  • The rankings are:
  1. Energy (XLE) - Overweight
  2. Materials (NYSEARCA:XLB) - Overweight
  3. Real Estate (NYSEARCA:XLRE) - Overweight
  4. Consumer Discretionary (NYSEARCA:XLY) - Overweight
  5. Financials (NYSEARCA:XLF) - Overweight
  6. Industrials (NYSEARCA:XLI) - Overweight
  7. Info Tech (NYSEARCA:XLK) - Overweight
  8. Consumer Staples (NYSEARCA:XLP) - Overweight
  9. Communication Services (NYSEARCA:XLC) - Underweight
  10. Utilities (NYSEARCA:XLU) - Underweight
  11. Healthcare (XLV) - Underweight

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