…of the Efficient Markets Hypothesis. Rather than random walking, sector funds seem to outperform the market when rotated according to a relative strength (momentum) criterion.
After performing a simple study, CXO Advisory concludes:
In summary, simple sector ETF momentum strategies have generally outperformed the broad stock market over the past decade for reasonably low trading frictions.
But wait, there’s more:
Including ETFs representing other asset classes (such as bonds, commodities, equity styles and international stocks) may enhance results.
That is essentially the recipe for our Global Macro separate account and the two Arrow Funds we sub-advise. Our own white paper on asset class rotation found the same thing. Relative strength just tries to go where the returns are. The evidence shows that often those returns persist.
