In this previous post, Dave in Philly recommended an interesting rotational system which would use Fidelity funds.
This system interests me in two ways. The first reason is that I am going to delve into some rotational systems in an attempt to find a system with a longer time horizon and lower trading fees, and this system seems to be a good place to start. The second reason that it interests me is that my wife has a 401K with Fidelity, and if the system turns out to be promising, perhaps I will trade it in her account.
Here is the article that describes the rotational system: Sector Rotation Strategy.
I will have to explore the Fidelity Sector funds and then find ETFs that correspond with them, in order to test the idea. The first order of business will be working on reducing the drawdowns that the author states are “at least as deep as the overall market.”
It should be a good jumping-off point.
For anyone who is interested, here is a link to a couple of articles I wrote last year when I was just beginning to code rotational strategies: 5 Day Rate of Change Simple System.
Hi, Wood!
What’s old is new again? There are two anomalies that even efficient market types will grudgingly consider: long-term outperformance of value stocks, and momentum. Sector rotation is a good example of momentum, and there is a fair amount of academic research supporting it. See http://www.cxoadvisory.com/blog/internal/blog-momentum-investing/Default.asp for a good overview.
I read magazine articles about Fidelity Select rotation dating from the late ’80s. I developed and traded a version in the mid ’90s, with about 100% return in 1995 (but that year was straight up — in a bull market everybody is a genius).
One additional idea is to rotate ETFs, to avoid Fidelity’s trading restrictions. Although sector ETFs aren’t usually as fine-grained as the Selects, you get tons of history that most ETFs don’t have. Some selects go back before 1987, so you get another black swan in your history. In any case, that extra data should help increase statistical robustness of your system.
To clarify, I meant that the Selects have lots of history that might be applicable in testing a rotation system even if you plan to trade ETFs.
Thanks for the info Toptick. I don’t think I’ve read that CXO report.
One problem might be that I don’t have historical data for fidelity funds from my data provider.
Here is a list of sector ETF’s that one can use and perhaps use instead of the Fidelity funds..
http://bespokeinvest.typepad.com/BespokeETFCheatSheet1.pdf
and global…
http://bespokeinvest.typepad.com/BespokeETFCheatSheetGlobal.pdf
For 11 years, 1989 to 2000 a fidelity sector switching system gained….well, here’s the money quote..
“By buying at the start of each month the top five best performing sector funds of the past 240 days, and then starting over again the subsequent month, he turned $50,000 invested on the last day of 1989 to $692,384 by December 31 last year; an annual 27 per cent rate of return. He used Fidelity’s Sector funds. Of course this is a ridiculously simple test and only goes back to 1989”
http://www.ifa.com/library/Support/Articles/Popular/FTarticle.asp
Here’s another one….For 15 years, this Fidelity switching system gained 37% average annual return..
http://www.optionetics.com/market/articles/13623
Excellent! Thanks for the links!
substitutes:
FSAIX air transport FAA
FSAGX gold GLD
FSAVX automotive
FBIOX biotech XBI
FSLBX brokerage & investment mgt KCE
FBSOX IT services
FSCHX chemicals
FDCPX computers
FSHOX construction & housing ITB
FSCPX consumer discretionary RXI
FCYIX industrials VIS
FSDAX defense & aerospace ITA
FSDCX communications equip IGN
FSELX electronics PHW
FSENX energy IYE
FSESX energy svcs IEZ
FSLEX environmental svcs EVX
FIDSX financial services IYG
FDFAX consumer staples RHS
FSPHX health care IYH
FSVLX home finance
FSCGX industrial equip XLI
FSDPX materials IYM
FSPCX insurance IAK
FDLSX leisure PEJ
FSHCX medical delivery IHF
FSMEX medical equip & supplies IHI
FBMPX multimedia IGN
FSNGX nat gas UNG
FNARX nat resources IGE
FNINX network & infrastructure PXQ
FSPFX paper & forest prod CUT
FPHAX pharmaceutical PJP
FSRBX banking PJB
FSRPX retailing PMR
FSCSX software & computer PSJ
FSPTX technolovy IGM
FSTCX telecom IYZ
FSRFX transportation IYT
FSUTX utilities IDU
FWRLX wireless PTE
Thomas, you rock! Thanks! BTW, I will email you tonight the monthly and annual gains you asked about. I forgot, ’til now, sorry!
Excellent contribution, TM.
A few alternatives to consider: for FSAGX, GDX is much more correlated. Similarly, UNG holds the commodity while FSNGX holds producers. XLE is slightly more correlated with FSENX than is IYE (and trades about 80x the volume).
There are more substitutions, but I’m definitely saving your list. Thanks!
Instead of GLD for a substitute of FSAGX, you definitely want to use GDX. That’s the ETF for the gold miners, GLD is the commodity itself.
Wood,
Do you know of any good database for historical fundamental data? Can’t find anything to test with.
Thanks.
Max, I do not, but I have forwarded your message along to a friend who probably does. I will report back.
Max, check this out. Thanks to DV over at dvindicators.com…
http://aaii.com/stockinvestor/intro/overview/
Wood,
Thanks to you and DV. I already checked AAII and they only go 8 Qs back (which means for comparison purposes, only 1yr). I’ve combed the web for a good historical fundamental database and cannot find any. Hard to believe it has no demand amongst individual investors.
Thanks for your help and the great quant posts.