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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's On Sector Rotation

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Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

This article discusses trading sector funds (ETFs or exchange traded funds) for peak performance by rebalancing a portfolio periodically. How often should you change a sector fund for another one? Let's find out.

Initial release: 2/14/2018


Sector Rotation: Summary

I performed two types of tests on sector ETF performance. The first determines if selecting the best performing, worst performing, or something in between gives the best future results of nine sector ETFs studied.

The second test checks if selecting sector ETFs should be done quarterly, semi-annually, or annually.

The answer comes in six parts, two for each holding period: Selecting the middle performer (rank 5 of 9) from 2000 to 2017 showed annual gains of 10.9%, but rotating the 4th best performing ETF did better after excluding the 2007-2009 bear market, that is, from 2010 to 2017. The annual gain was 16.34%.

Changing sector funds every six months worked best for rank 2 funds in the 2000-2017 period (10.12% gain), and selecting the worst performing fund during the 2010-2017 period gave the best future results of the three holding periods studied: 18.47% annually.

Finally, if you wish to change funds only once a year, the rank 7 funds worked best with annual gains of 12.86% from 2000 to 2017, the best of the three holding periods over the entire study period (2000 to 2017). The rank 3 funds did best during the bull market from 2010-2017 by making 14.66% annually.

In short, pick the worst performing fund every six months for the best annual performance in a bull market.

The tables in this article also highlight two other holding periods, the most recent 3 years (2015-2017) and 2 years (2016-2017). Rank 3 (the third best performing sector ETF) funds work best if you're picking funds quarterly. For semi-annual holding periods, choose the second ranked fund. For annual rotation, the rank 5 (midrange) fund worked best.


Sector Rotation: Background

Marisa Yang wrote an article titled, "Capitalizing on sector rotation strategies" for the February 2018 issue of Technical Analysis of Stocks & Commodities magazine.

She compared the performance of nine sector funds with data going back to 2000. Here's the list.

  • Consumer discretionary (XLY)
  • Consumer staples (XLP)
  • Energy (XLE)
  • Financials (XLF)
  • Health care (XLV)
  • Industrials (XLI)
  • Materials (XLB)
  • Technology (XLK)
  • Utilities (XLU)

She analyzed the performance of the above sector funds from 2000 to 2016 and tested three variations: The best performer (what she terms "Best Momentum Strategy"), the worst performance ("Worst Momentum Strategy"), and the mid performer ("Mid-Tier Momentum Strategy").

Her analysis included a risk-reward profile, simple moving average on both the risk-reward profile and risk reduction.


Sector Rotation: Methodology

Both of us used data pulled from Unfortunately, due to dividend adjustments, I could not duplicate most of Yang's numerical results (they were close, but not an exact match) in her table, but my results and hers agreed on the performance rank.

Here's how she describes the method for analyzing performance quarterly.

"I rank each sector based on its current quarterly performance, that is, percentage change in price between the previous quarter and current quarter close. The sector ETF with the best return in the current quarter is the best momentum sector; the continual investment in each quarter's best momentum sector is referred to as the best momentum strategy. Each ranked sector ETF is purchased at current quarter's close; its performance is evaluated based on its next quarterly performance, that is, percentage change in price between the current and next quarter's close. These quarterly results are then added according to their calendar years to generate the annual return for the momentum strategy."

Don't let the phrase "continual investment" throw you. Ignore it. Each quarter, you select the best performing fund and hold it for a quarter. Then do it all over again.

Add the performance of the quarter after you buy and sums the four quarterly results to get the annual return for that year. She adds the years together to get the average per year.


Sector Rotation: Yang Results

Yang found that the best performing sector funds (picking the best performing fund for that quarter, holding it a quarter, rinse and repeat) had an average yearly gain of 4.58% from 2000 to 2016. The thinking here is to buy high and sell higher, a momentum strategy using the best performing sector ETF each quarter.

However, the worst performing funds did better. This strategy is bottom fishing, picking the worst performing sector this quarter and hope performance rebounds the next quarter. She found that the average gain was 5.31%, or 16% better than the best performers described in the prior paragraph.

That's not a real surprise for those who have studied bottom fishing and buying fallen angels. I like to bottom fish when searching for stocks to add to my portfolio.

The big surprise is that she found the mid tier ETFs outperformed the best and worst ETFs.

ETFs with a middle rank of 5 (out of 9 funds) had an average annual gain of 9.91%. That's 116% better than the best performing funds and 86% better than the worst performing funds.


Sector Rotation: Bulkowski Results

The following tables show the performance of the nine strategies using data from 2000 to 2017. This is a year longer than Yang's study, so the results are not comparable but the trends are similar.

Quarterly Sector Rotation
Strategy 2000-2017 2010-2017 2015-2017 2016-2017
9 (worst performers)4.24%8.63%7.88%14.67%
5 (mid range performers)10.90%13.74%7.98%19.45%
1 (best performers)3.30%7.99%5.35%15.17%

The rotation strategy of selecting the best performing fund each quarter (strategy 1) showed an average annual gain of 3.3% for the years 2000 to 2017.

This compares to a 4.24% gain by selecting the worst performing fund each quarter (strategy 9).

Of course, the star performance came from the mid range group which gained an average of 10.9% annually.

This result agrees with what Yang found.

I also show the performance of the various strategies over different time periods. The "2010-2017" column excludes the 2007-2009 bear market. The other two columns show more recent performance.

If you exclude the 2007 to 2009 bear market (that is look at the 2010-2017 column, which I prefer), the rank 4 ETFs did best with gains averaging 16.34% annually.


Semi-Annual Rotation

Semi-Annual Sector Rotation
Strategy 2000-2017 2010-2017 2015-2017 2016-2017
9 (worst)8.54%18.47%18.87%28.63%
1 (best)9.72%12.52%6.23%6.53%

This table shows the performance of funds when they are bought twice a year (at the end of June and December). The table follows the same format as the prior one.

I've highlighted the best performing strategy in each column.

Notice that the second strategy works best when a new fund is selected every six months.

Also notice that three out of four of the bold numbers beat the performance of the prior table's bold numbers. It suggests that trading ETFs semi-annually gives better performance than trading them quarterly.

Let's check how the annual rotation works. I show those results in the next table.


Annual Rotation

Annual Sector Rotation
Strategy 2000-2017 2010-2017 2015-2017 2016-2017
9 (worst)5.44%12.12%7.31%22.87%
1 (best)2.38%5.60%-2.58%0.31%

The performance of these strategies, shown in the table on the right, are based on an annual rotation. That is, at the start of each year, performance is evaluated and a fund is selected to hold for the entire year.

Notice that only one bold entry (12.86% in the first column) beats the prior table's values.

The results suggest that a semi-annual rotation is best for peak performance among the three durations tested.

This table highlights the mid range group (strategy 5) as doing the best in the last two and three years.

-- Thomas Bulkowski


See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Bipolar: Refers to someone who has homes in Nome, Alaska and Buffalo.