A few years ago, we had a look at using momentum to rotate through SPDR Sector ETFs. We concluded that just buying & holding the S&P 500 ETF was a winning idea. However, after looking at industry rotation in Indian stocks, we checked if using the same technique on SPDR Sector ETFs made sense.
Sadly, no. If you held the top 5 ETFs in the Leading quadrant for a month, you solidly under-performed SPY.
What if you did a 5-year rolling window to pick a portfolio of 4 ETFs that had the highest Sharpe Ratio and held them for a year?
There’s enough juice even after assuming a 25bps transaction cost.
However, the out-performance is uneven. You could go years before you will see this strategy pay off.
There’s a caveat here for Indian investors. Gains for holding periods of less than two years is treated as regular income. So, depending on your tax slab, you could lose in taxes what you gained employing this strategy. A two-year holding period where half the portfolio is rebalanced every alternate year to meet the capital gains treatment had uninspiring returns.
We explored a bunch of other scenarios that did not clear the bar. You can read about it and have a look at the code on github.