These days it really seems that the commentary around sector-rotation dynamics has become a central topic of conversation across various social media platforms.
From investors debating whether the recent drop in software-related names makes for a compelling long-term opportunity…
…to more active market participants weighing the odds of a correction in semiconductors after an essentially unprecedented run…
…to swing traders shifting their attention to biotech, which has recently set a fresh multi-year high after a long stretch of consolidation.
As a team that manages proprietary capital through quantitative frameworks, market views and commentary sit outside of what we deal with day to day, but every now and then they can spark some interesting ideas.
Inspired by the dispersion in sector returns we have recently witnessed, today we present a trading strategy that seeks to exploit momentary price dislocations, in a way that remains attractive net of conservative transaction-cost assumptions.
As a case study, we apply it to three industry ETFs that capture some of the sector-rotation “debate” mentioned earlier: the iShares Semiconductor ETF (SOXX), the iShares Expanded Tech-Software ETF (IGV), and the iShares Biotechnology ETF (IBB).
We show how a portfolio constructed by actively timing these ETFs has generated a net-of-fee CAGR of 24.6% and a Sharpe ratio of 1.17, while keeping maximum drawdown at ~20%.
In addition to the rules behind the signal and our portfolio-construction approach, this piece gives us a chance to touch on a delicate topic that, in our opinion, is central to the analysis and implementation of many short-term trading strategies.