How To Protect Your Portfolio By Following The Signals From The Consumer Sectors

Source: ETFreplay

Providing more details, the table shows the annual returns and drawdowns for the quantitative strategy versus the benchmark in different years. The strategy outperformed by a wide margin during the Great Financial Crisis in 2008 and 2009 because it was positioned in treasuries during most of that period.

Most recently, the strategy was positioned in treasuries since January of 2020, so it avoided the COVID-19 selloff and it even made a nice return of 13.4% in the first quarter of 2020.

Source: ETFreplay

There are some important considerations to keep in mind when analyzing performance. This particular strategy was already positioned for safety in January, well before the COVID-19 crisis triggered a staggering selloff. However, there is no guarantee that the strategy will react with enough speed going forward, there is always some randomness involved when analyzing short-term performance.

The strategy only trades once per month, so there is always the possibility that the portfolio will be wrongly positioned and it won't be able to react with enough speed if the market decline happens in a short period of time.

Besides, market conditions have a big impact on performance. The strategy can be expected to deliver attractive gains in periods when there are strong and well-defined trends in the market, either up or down. Conversely, in a sideways year such as 2015, the strategy will probably deliver too many false signals and ultimately disappointing returns.

This strategy was originally designed with the traditional market cap-weighted versions of the consumer discretionary and consumer staples ETFs. Since Amazon (AMZN) now accounts for 26% of the Consumer Discretionary Select Sector SPDR ETF (XLY), the strategy then switched to the equal-weighted ETFs in order to guarantee that there is no one single stock having a big impact on the signals.

An equal-weighted approach is more representative, but it also can have some drawbacks. If Amazon continues stealing market share away from brick-and-mortar retailers, the losses from those retailers are actually Amazon's gains. However, since the ETF gives an equal-weight to all of the stocks in the portfolio, regardless of size, this can actually underestimate the true gains in the consumer discretionary sector as a whole.

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Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in ...

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