Comparing “Winners,” “Median,” and “Losers” Rotation Strategies with S&P 500 Sector ETFs

Abstract

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This article proposes a simple periodic ETF sector rotation strategy for S&P 500. Unlike most ETF rotation strategies, the proposed strategy does not predict economic cycles. The strategy involves periodic ranking of component sectors based on sector ETF returns and reinvesting funds equally into the middle (median) three sector ETFs. We show that for the S&P 500, the proposed “median” ETF rotation strategy with monthly rebalancing is better than focusing on the winners- or the losers-sector ETFs with different frequencies of rebalancing. Using historical data from 2000 to 2024, we show that the proposed median monthly rotation strategy significantly outperforms the other two strategies and passive index investment in terms of total return, volatility, and maximum drawdown. An average investor can easily implement the proposed ETF rotation strategy.