If you were to sort the SPY sector funds by trailing 36-month total return at the end of each year, then divide your money evenly among the top 3, you would have achieved excellent results over the past several years.
Caveat: these ETFs were launched less than a decade ago, so the data is limited, but studies done with sector mutual funds going back to the 1980s have produced similar results. Also, I have a quibble with how Yahoo calculates its "adjusted prices" which are used here for total return calculation. These returns overstate slightly the returns per year when adjusted for dividends paid. For example, if a stock began the year at $100, paid a $3 dividend, then ended the year at $110, your total return would be 13% ($10 capital gain plus $3 dividend). Yahoo calculates it somewhat differently, in effect subtracting $3 from the initial price (making it $97 ($100 minus the $3 dividend paid)). This creates a return of 13.4% rather than $13% ($110/$97 - 1 = 13.4%). This may seem like a trivial difference, but compounded over a long data series, these differences add up. Nevertheless, for simplicity's sake, I used the Yahoo adjusted price for total return calculations, understanding that it overstates the returns of high dividend-yielding stocks.
I only had month-end data to August, 2007, so did not of course have the full year results available as of writing this.
Nevertheless, the results are impressive:
| Model: Invest in the top 3 SPY sector funds by trailing 36 month return, December, 2003 - August, 2007*: |
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| Start Date: | Dec-03 | Aug-07 | <> |
| Model: | SPY: | Diff: | 3.67 | years |
| 10k: | 18,180 | 14,048 | 4,132 |
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| rr: | 17.7% | 9.7% | 8.0% |
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| worst: | 5.3% | 4.8% | 0.5% |
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| % of years > SPY: | 100.0% |
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| 10th %ile: | 9.0% | 4.9% | 4.1% |
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| rr + 10th %ile: | 26.7% | 14.6% | 12.1% |
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$10,000 invested at year-end 2003 grows to $18,180 (17.7% per year) versus $14,048 in the SPY (9.7% per year), a difference of 8.0% percent per year.
Every year of the study period led to an outperformance of the model versus the SPY.
Here is a year-by-year breakdown with each of the winning funds:
| Date | IYR | XLB | XLE | XLF | XLI | XLK | XLP | XLU | XLV | XLY | SPY |
| avg rr: | 10k-> | SPY: | | Dec-99 |
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| | Dec-00 |
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| | Dec-01 |
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| | Dec-02 |
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| 10,000 | 10,000 | | Dec-03 | 30.2% | 13.5% |
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| 12.9% | 10.7% |
| 18.8% | 11,883 | 11,070 | | Dec-04 | 9.0% | 4.0% | 40.2% |
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| 4.8% |
| 17.7% | 13,992 | 11,605 | | Dec-05 | 33.2% |
| 17.3% |
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| 19.8% |
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| 15.2% |
| 23.4% | 17,268 | 13,370 | | Dec-06 | -10.4% |
| 19.8% |
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| 6.4% |
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| 5.1% |
| 5.3% | 18,180 | 14,048 |
The number shown for each fund is the next 12 months return. If no number is shown, then the fund was not one of the top 3 by trailing 3 year return. Notice that real estate (IYR) and energy (XLE) dominated, appearing 4/4 and 3/4 the years in question.
The model did even better, although it is a high risk strategy I would not recommend, if only the single top sector ETF were bought and held for the next 12 months:
Model: Invest in the top 1 SPY sector funds by trailing 36 month return, December, 2003 - August, 2007*: |
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| Start Date: | Dec-03 | Aug-07 | <> |
| Model: | SPY: | Diff: | 3.67 | years |
| 10k: | 19,941 | 14,048 | 5,893 |
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| rr: | 20.7% | 9.7% | 11.0% |
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| worst: | 9.0% | 4.8% | 4.2% |
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| % of years > SPY: | 100.0% |
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| 10th %ile: | 11.5% | 4.9% | 6.6% |
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| rr + 10th %ile: | 32.2% | 14.6% | 17.6% |
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