ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Sector Rotation Strategies Have Often Beat the Market

Updated on October 23, 2016

Sector Rotation - Is it Possible to Achieve Above Average Returns with Below Average Risk?

One of the goals of most investors is to get higher overall investment returns than the overall market but at a lower overall risk than the markets. One way to do this has historically been to use a sector rotation strategy. Here is a look at a freely available strategy using Fidelity Select Funds that works by finding the best mutual funds and rotating through them as they gain and loose strength.

A Free Sector Rotation Strategy

Playing the Market with Thought Out Strategy

The overall stock market has had a run of flat performance over the last several years. If you look at the performance of the S&P 500 from 1999 through 2005, you'll see that it was up about 0.2% compounded annual return, not much better than a money market fund, and the Nasdaq 100 has fared even worse. Granted, it got there in an interesting way, but overall it basically went nowhere.

For an investor looking to better that performance, what are the alternatives to index funds or buy and hold investing? Sector fund investing, using a rotation strategy has been shown to work by a variety of different newsletters and advisors. Many of the top performing newsletters in the Hulbert Financial Digest use some variant of this type of strategy. This is easily done using sector mutual funds, such as the Fidelity Select Funds family.

Fidelity Select Mutual Funds - A plug for a system that works

Here we look at a mutual fund trading system that trades the Fidelity Select Mutual Funds. The Fidelity Select Mutual Funds are a good choice for several reasons:

  • Fidelity Select Mutual Funds historically have persistence in their trends so they can be held for the Fidelity imposed minimum 30 day holding period while realizing a return well above that of the market.
  • Fidelity Select Mutual Funds historically have persistence in their trends so they can be held for the Fidelity imposed minimum 30 day holding period while realizing a return well above that of the market.
  • If you hold the funds for a 30 day minimum, Fidelity allows unlimited trading with no redemption fees.
  • With over 40 Fidelity Select Funds, there is a sector fund is available to track most market sectors. If there is strength in any domestic market sector, you'll probably capture it using Fidelity Select Funds.
  • Fidelity's minimum investment requirement for the Fidelity Select Funds is only $2500 per fund, so that is all you need to start. Fidelity has eliminated the load on the Select funds, so there is no up front cost to get into them.

The 5-Step Strategy

Many sector rotation strategies have been published, dating back to the late 1990s, but this one is one of the simplest for you to follow. The steps are as follows.

1) Track the 25 day (or 5 week) price change in all of the Fidelity Select Mutual Funds.

2) Invest in the Fidelity Select Fund with the highest percentage gain over that 5 weeks.

3) Hold that Select fund for at least 30 calendar days, to avoid the Fidelity early redemption fees.

4) After 30 days, if that Select Fund is still the top Select fund, continue to hold it. Otherwise, exchange it immediately for the currently top ranked Select fund

5) Hold the new Select Fund for 30 calendar days

For the 1999 to 2005 years that the major indexes have been almost flat, this sector fund rotation system would have gained almost 200%, or over 16% per year.

There is one significant drawback to this system. It does not have a much better drawdown than the overall markets. During the down years of 2000 to 2002 this strategy had a drawdown of almost 50 percent. Fortunately, it has achieved new all time highs in 2006, but that kind of drawdown need to be factored in to how much you might want to invest in this or any investment strategy.

One way to improve the performance while reducing risk is to rotate into a cash fund when the strongest fund has not had a positive return over the last 30 days. Another way is to weigh the fund rankings by adjusting for the recent volatility and favoring the less volatile ones as a way to find the best mutual funds.

As you can see, even a simple sector rotation strategy can give a real performance advantage over buy and hold investing. This type of strategy should be part of every investor's portfolio.

What's Your Favorite Investment Strategy?

    0 of 8192 characters used
    Post Comment

    • profile image

      anonymous 

      6 years ago

      www.sumgrowth.com

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)