Strategy Card

Sector Relative Strength Rotation (3/6/12m vs SPY) — strategy card

Spec ID: spec-sector-momentum-rotation-etf-top50-1767027941_v13 · Generated: 2026-07-10 06:40 UTC

Cluster: Momentum · Sub Cluster: Sector Etf Relative Strength

One-line description

Monthly rotation strategy that ranks liquid U.S. sector ETFs by 3/6/12-month relative strength versus SPY. It holds the top 3 names equal-weighted and rebalances on the first trading day using next-open execution.

Why this trade exists

Sector leadership tends to persist over intermediate horizons due to institutional flows, slow-moving macro repricing, earnings-cycle dispersion, and benchmark-relative allocation decisions. Ranking sectors versus SPY attempts to isolate cross-sectional leadership from broad market beta, while using multiple lookbacks reduces dependence on a single formation window.

The ETF implementation is liquid and capacity-friendly, but the edge is still exposed to crowding, factor regime shifts, and abrupt sector reversals.

Algorithm

[code omitted from public view]

Parameters

Param	Value	Notes
Rule type	SECTOR_MOMENTUM	Cross-sectional sector ETF momentum versus SPY
Lookbacks	63, 126, 252 trading days	Approximately 3/6/12 months
Relative strength	ETF total return / SPY total return	Computed separately per lookback
Composite score	Mean z-score across lookbacks	Cross-sectional normalization before averaging
Selection count	3	Holds top-ranked sector ETFs
Position sizing	Equal weight	Subject to max position cap
Gross leverage	1.0	Long-only, fully invested target
Max weight per position	40%	Risk override cap
Min positions	3	Desired minimum holdings
Rebalance frequency	Monthly	First trading day of month
Execution	Next open	1 trading day signal lag
Liquidity filter	63-day ADV >= 250,000 shares	Share-volume filter
Price-history requirement	252 trading days	Drop if missing any lookback
Universe	Top 50 U.S. ETFs by capitalization, filtered to sector ETFs	Sector identification via provider metadata/name matching
Benchmark	SPY	Used for relative-strength denominator
Volatility targeting	False	No vol scaling
Stop loss	None	No explicit stop
Transaction cost	10 bps	Plus proportional-to-spread slippage proxy using 20-day spread window
Backtest interval	2020-01-01 to 2026-07-15	As specified in backtest plan
Available data period	2018-01-01 to 2023-01-01	Context-provided data range

Look-ahead audit

#	Concern	Status
1	Signal timing	Uses a 1-trading-day signal lag and next-open execution, reducing same-close look-ahead risk.
2	Return lookbacks	Signals are based on trailing 63/126/252-day total returns only; candidates with missing lookback data are dropped.
3	Universe construction	Sector ETF filter should be checked for point-in-time metadata availability; name/category metadata may be survivorship-biased if sourced current-state.
4	Liquidity filter	Uses trailing 63-day volume; implementation should ensure the volume window ends before the signal date.
5	Benchmark data	SPY relative-strength denominator must use the same lagged timestamp convention as ETF prices.
6	Corporate actions/distributions	Total-return calculations should use adjusted prices or distribution-inclusive series to avoid dividend-related bias.

Caveats / known limitations

• The effective sector universe appears narrow in the provided top-50 ETF list, with only XLK and XLV explicitly visible; results may depend heavily on metadata expansion and universe filtering.
• Backtest window and available data-period fields are not fully aligned in the context, so sample coverage should be verified before relying on conclusions.
• Sector momentum can reverse sharply around macro shocks, rate regime changes, or crowded positioning unwinds.
• Long-only exposure leaves the strategy materially exposed to equity-market drawdowns despite using SPY-relative rankings.
• No volatility targeting or stop loss is used; realized volatility and drawdowns can remain high.
• Monthly rebalancing may miss fast leadership changes and can concentrate risk in correlated growth/defensive themes.
• ETF metadata, inception dates, and survivorship handling require additional point-in-time validation.

Results

The reported backtest is strong on headline performance, with total return of 161.24%, Sharpe of 1.21, Sortino of 1.50, and win rate of 85.71% across 56 trades. Risk is non-trivial: volatility is 20.50% and max drawdown reaches -23.83%, consistent with a concentrated long-only sector rotation profile. The unusually high profit factor of 27.17 is encouraging but should be treated cautiously until universe construction, sample dates, and point-in-time sector ETF membership are independently audited.

Backtest metrics snapshot

Metric	Value
Total Return	161.24%
Sharpe	1.21
Sortino	1.50
Calmar	0.67
Max Drawdown	-23.83%
Volatility	20.50%
Win Rate	85.71%
Profit Factor	27.17
Total Trades	56
Symbols	50 (AGG, BIL, BIV, BND, BNDX, BSV, DIA, EFA, GLD, IEFA, +40 more)