About a month ago, I decided to look at historical Sector SPDR ETF price data to see if a sector’s performance the previous month had any predictive power in determining its performance the following month. Here’s the methodology I used, step by step.
- I first made a spreadsheet with the monthly opening price for all nine Sector SPDR ETFs going back to their launch in 1999. I then used these prices to determine each sector’s monthly return (excluding dividends).
- Next I assigned a monthly ranking (1-9) to each sector based on their respective returns for that month.
- Finally, I calculated the average monthly return for each rank if one had decided to buy a sector ETF the following month based on that sector’s rank the previous month. For example, the average monthly return of the 1st rank is the average monthly return for an investor that, at the beginning of every month, bought the sector ETF with the highest return the previous month – and repeated this every month starting in March of 1999. This was done for all ranks, 1 though 9.
The sectors that finished 3rd and 4th the previous month had an average monthly return of 0.66%, compared to 0.15% for the S&P 500. If you started with $100,000 on February 1, 1999 and invested until the present using this strategy, you would have ended up with around $242,440 going with the 3rd ranked and around $223,360 going with the 4th ranked, compared to around $109,860 for the S&P 500.
It was also interesting that the trend held regardless of the direction of the market, as you can see in the table below. With the exception of the “3rd ranked” strategy from 2002 to 2007, both strategies beat the S&P 500 over each respective time period going back to 1999. And the best part is that this would have been done passively, for the most part, with zero research. There may be room for even more gains by going with a few well-positioned companies within these sectors.
Truthfully, I have no idea why the sectors ranked 3rd and 4th the previous month perform so well over time, and I’m definitely open to possible explanations. My guess is the sectors that finished 3rd and 4th the previous month are more likely to be sectors in the midst of a sustained bullish ascent, before they reach the “irrational exuberance” stage of their respective bull markets. It would make sense for these sectors to slightly outperform the overall market during up months and avoid the large declines of overbought sectors during down months. But that’s just my interpretation. What’s yours?