Sector Rotation Model (SRM)

The stock market can be broken down into various sectors. At different times and for varying reasons, some sectors drastically outperform others. One proven method for beating the market is to focus your investments in the sectors that are performing the strongest.

The Sector Rotation Model (SRM) helps you earn outsized returns by staying in tune with the best performing areas of the market. It utilizes the 11 Sector SPDR Exchange-Traded Funds (ETFs) to keep you in the top performing sector at any given time. As different sectors take turns leading the way higher, the SRM adapts, resulting in a strategy that achieves higher returns with less risk.

The chart below shows the backtested performance of the SRM over the last 23 years. For comparison, the performance of SPY (an index fund that tracks the performance of the S&P 500) is included in the chart. By utilizing a dynamic approach to sector rotation, the SRM was able to handily beat the S&P 500, while also avoiding major losses during the last three market crashes.

Model performance represents total returns and includes reinvestment of dividends and interest. No management fees or transaction costs are included. Historical performance is not an indication or guarantee of future performance.

The Sector Rotation Model (SRM) selects the top performing sector each month and shifts its investment accordingly. By only initiating at most one trade per month, trading costs are minimized. The model occasionally recommends the same sector from one month to the next, when an outperforming sector continues to outperform.

The SRM also contains a built-in mechanism for moving to cash during severe market declines. There is no point in being in the strongest performing sector if that sector is still expected to provide a negative return.

Notice the flat horizontal lines in the chart above from mid-2000 to mid-2003, and also from early-2008 to late-2009. During these periods (the dot-com collapse and the financial crisis) the SRM went to cash, effectively avoiding the two most severe bear markets in recent history. The ability of the SRM to avoid major market declines is one of the primary reasons for its significant outperformance over time.

When the SRM moves to cash, you can utilize the Asset Rotation Model (ARM) to determine if bonds are an acceptable investment in the meantime. Using both the SRM and ARM together will result in even greater returns, as seen in the chart above and table below.

Not only is the Sector Rotation Model able to deliver enhanced returns, it does so with less overall risk. The table below contains a series of performance metrics that allow you to compare the SRM against SPY (investable proxy for the S&P 500).

Key Performance Highlights:

• Over the last 23 years the SRM’s compound annual return has significantly outpaced that of the broader market, and nearly doubled it in the case of using the SRM and ARM together.
• These high returns were achieved while exposing the portfolio to significantly less risk than the market experienced.
• The reduced volatility and enhanced returns provide for notably higher risk-adjusted returns, as evidenced by the Sharpe, Sortino and Treynor ratios, and a positive alpha.
• Stocks lost over half their value during the financial crisis. The SRM was able to sidestep those losses by moving to cash (or bonds in the case of SRM + ARM).

The 11 sector ETFs that the SRM utilizes are listed below. These ETFs divide the S&P 500 into 11 sector index funds. Each fund has the diversification of a mutual fund, the targeted focus of a sector fund, and the easy-to-trade characteristics of a stock. All ETFs are highly liquid, allowing you to enter and exit positions with ease. More information about the Sector SPDR Exchange-Traded Funds can be found here.

The current SRM selection and ongoing monthly updates are accessible with a premium subscription. Updated recommendations are provided on the first day of each month. Sign up today for access to the Sector Rotation Model and all of our other models.

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Sector Rotation Model FAQs

• What is the Sector Rotation Model?

  The Sector Rotation Model (SRM) is one of our top performing Investment Models, designed to identify and invest in the strongest performing sectors of the stock market.

• How does the Sector Rotation Model work?

  During periods when stocks are rising, different sectors of the market take turns leading the way higher. The Sector Rotation Model (SRM) analyzes each sector independently to identify and invest in the strongest performing sectors of the market. Learn More

• Who should use the Sector Rotation Model?

  The Sector Rotation Model is suitable for all investors and can make a great addition to any portfolio. It was designed for investors who are willing to take on a bit more risk (when compared to the Asset Rotation Model) in exchange for higher returns.

• What role should the SRM play in my overall portfolio?

  When compared to the Asset Rotation Model, the SRM achieves higher returns at the expense of additional volatility. As a result, we recommend using the ARM for the majority one’s portfolio, and using the SRM for the balance. This ensures adequate diversification without causing any type of performance drag.

• Where can I see the SRM’s historical performance?

  You can view the SRM’s historical backtested performance here. Pay special attention to the table of risk metrics, you’ll notice that the SRM significantly outperforms the S&P 500 while exposing your money to less risk.

• How does the SRM achieve such high performance?

  The SRM uses proprietary technology to stay invested in the top performing sectors of the market as they take turns leading the way higher. When the stock market as a whole begins to falter, the SRM is able to move to cash to avoid major market crashes. Learn More

• Where can I see the latest SRM recommendations?

  You can see the latest SRM recommendations here. Access requires a premium subscription.

• How do I use the SRM?

  Using the SRM is simple. Each month you will receive an alert when the latest SRM recommendations have been posted. Simply log in to your brokerage account and make the appropriate changes to your investments. Learn More

• I’m already retired, can I still use the SRM?

  Yes. People are living longer these days and it’s important that your money continues to work for you during retirement. Because the SRM has been able to generate higher returns than both stocks and bonds, and also avoid major losses during market crashes, we feel comfortable recommending it as a portion of any investor’s portfolio. For more information on how to de-risk your portfolio during retirement, please see this article.

• Will I incur transaction costs while using the SRM?

  Yes, but they should be negligible. We designed the SRM to use low cost ETFs and make a minimal number of trades each year. This helps you reduce expenses, which can make a big difference over the long run.

• What happens to the SRM if the stock market crashes?

  The SRM is able to recognize developing periods of stock market weakness and will typically move to cash during the early stages of a crash. When the SRM shifts to cash, we recommend following the Asset Rotation Model with those funds until the SRM reenters the stock market.

• Do the Sector Rotation Model and Asset Rotation Model work in harmony?

  To some extent, yes. Both the ARM and SRM will enter and exit stocks at the same time. When the ARM recommends stocks, you can utilize the SRM to find and invest in the top performing sectors of the market. Conversely, when the SRM goes to cash, you can use the ARM to determine if bonds are a suitable place to invest that cash.

• What does “SRM + ARM” refer to?

  This refers to using the Sector Rotation Model and Asset Rotation Model together. Specifically, it refers to the performance that would be achieved by following the SRM when it is invested in the stock market, and following the ARM during periods when the SRM has switched to cash.