Strategy Card

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

Spec ID: spec-sector-momentum-rotation-etf-top50-1767027941_v15 · Generated: 2026-07-10 10:42 UTC

Cluster: Momentum · Sub Cluster: Sector Etf Relative Strength Rotation

One-line description

Monthly rotates into the three most attractive U.S. sector ETFs based on composite 3-, 6-, and 12-month relative strength versus SPY. Positions are equal-weighted, long-only, and traded at the next open after a one-day signal lag.

Why this trade exists

Sector leadership tends to persist over intermediate horizons because macro shocks, earnings revisions, policy regimes, and investor flows affect industries unevenly. Ranking sectors relative to SPY attempts to isolate cross-sectional leadership from the broad equity-market beta component.

Using multiple lookbacks reduces dependence on a single momentum horizon: 3-month strength captures faster rotation, while 6- and 12-month strength emphasize more durable trends. ETF implementation keeps the trade liquid and diversified within each sector, but the edge remains exposed to momentum crashes and regime reversals.

Algorithm

[code omitted from public view]

Parameters

Param	Value	Notes
Universe	Top 50 U.S. ETFs by capitalization	Sector ETF filter applied using metadata/name keywords such as Select Sector, Sector, SPDR, XL
Benchmark	SPY	Relative strength denominator
Lookbacks	63, 126, 252 trading days	Approx. 3/6/12 months
Score	Mean z-score across lookbacks	Cross-sectional normalization by horizon
Selection count	3 ETFs	Top-ranked sector ETFs only
Position sizing	Equal weight	Long-only, gross leverage 1.0
Max weight per position	40%	Risk override; effectively non-binding for 3 equal weights unless fewer names
Min positions	3	Strategy expects at least 3 candidates
Rebalance	Monthly, first trading day	Signals lagged by 1 trading day
Execution	Next open	Uses prior signal to reduce look-ahead risk
Liquidity filter	63-day ADV >= 250,000 shares	Share-volume based liquidity screen
Missing data	Drop if missing any lookback	Requires 252 trading days of history
Costs	10 bps transaction cost + proportional spread slippage	Spread proxy uses 20 days
Stop loss	None	No explicit downside stop
Volatility targeting	False	Full exposure maintained when invested
Backtest window	2020-01-01 to 2026-07-01 specified	Provided data period is 2018-01-01 to 2023-01-01; verify effective test coverage

Look-ahead audit

#	Concern	Status
1	Signal uses prices unavailable at rebalance execution	Mitigated by 1-trading-day signal lag and next-open execution
2	ETF universe membership may use future metadata or current top-50 list	Needs verification; annual point-in-time screening is indicated but survivorship risk remains possible
3	Relative strength calculations may include same-day close before next-open trade	Acceptable if signal date precedes execution date after lag
4	Missing data and liquidity filters could accidentally use forward information	Should be computed only from trailing history as specified
5	Corporate actions / total return adjustment	Requires adjusted total-return series or dividend-adjusted ETF prices
6	Backtest date coverage inconsistency	Backtest interval and available data period should be reconciled before relying on live expectations

Caveats / known limitations

• Concentrated exposure: only three sector ETFs, so the portfolio can become heavily tilted toward a narrow macro or factor theme.
• Long-only construction retains broad equity-market drawdown risk despite ranking versus SPY.
• Sector momentum can reverse sharply around policy changes, rate shocks, earnings inflections, or crowded positioning unwinds.
• Sector ETF identification via metadata/name matching may omit valid sector funds or include non-comparable ETFs if classifications are stale.
• The top-50 ETF universe contains many non-sector ETFs; effective candidate count may be small after filtering.
• No volatility targeting or stop loss, so realized volatility and drawdowns can expand in stressed regimes.
• Reported performance may be sensitive to execution assumptions, spread estimates, and the effective point-in-time universe.

Results

The backtest shows strong absolute performance for a simple monthly sector-rotation rule, with total return of 159.28%, Sharpe of 1.21, Sortino of 1.49, and Calmar of 0.66. Risk is material: volatility is 20.39% and max drawdown reaches -23.83%, consistent with concentrated long-only equity-sector exposure. The high win rate of 85.71% and profit factor of 26.94 over 56 trades are encouraging but should be interpreted cautiously given the short effective sample and the need to validate point-in-time universe construction.

Backtest metrics snapshot

Metric	Value
Total Return	159.28%
Sharpe	1.21
Sortino	1.49
Calmar	0.66
Max Drawdown	-23.83%
Volatility	20.39%
Win Rate	85.71%
Profit Factor	26.94
Total Trades	56
Symbols	50 (AGG, BIL, BIV, BND, BNDX, BSV, DIA, EFA, GLD, IEFA, +40 more)