Strategy Guide
ETF Sector Rotation Strategy:
A Complete System Backtested 2006–2026
ETF sector rotation is a systematic approach that shifts capital between market sectors based on relative price momentum. Rather than holding a static portfolio, you move into the strongest sectors and exit the weakest, letting the market tell you where capital is flowing.
This page documents the specific rotation system we run at Momentum Capital: the universe, the signal, the filter, and 20 years of verified backtest results.
Backtest Results (2006–2026)
| Metric | This Strategy | SPY Buy & Hold |
|---|---|---|
| CAGR | 48.62% | 10.80% |
| Sharpe Ratio | 1.182 | 0.61 |
| Max Drawdown | -47.3% | -55.2% |
| $10k → (20 years) | $27.8M | $78k |
Backtested 2006–2026. Past performance does not guarantee future results.
How the Rotation System Works
Step 1: Rank all 18 themes by momentum
Every 7 days, the system calculates the 16-week price return for each of the 18 themes in the universe. This is the momentum signal:
Step 2: Apply the EMA trend filter
A theme only qualifies for selection if it is in a confirmed uptrend. The EMA filter verifies this using multiple exponential moving averages on daily price data. All must be aligned in an upward sequence before capital is deployed.
This filter prevented any crypto allocation during the 2018–19 and 2022–23 bear markets. If nothing qualifies, the strategy holds cash. A high-momentum theme in a downtrend is still a downtrend.
Step 3: Allocate to the top qualifiers
Balanced mode selects the top 2 qualifying themes and allocates 50% to each. Growth mode selects the top 1 and allocates 100%. Both rebalance on a fixed schedule: 7 days for Balanced, 30 days for Growth.
The 18-Theme Universe
ETFs are held directly. No individual stock picking, no survivorship bias risk from company failures. Pro (Balanced) uses Clean Energy (ICLN); Premium (Growth) uses Gold Miners (GDX) in that slot.
| Ticker | Theme |
|---|---|
| XLK | Technology |
| XLF | Financials |
| XLV | Healthcare |
| XLE | Energy |
| XLY | Consumer Cyclical |
| XLP | Consumer Defensive |
| XLI | Industrials |
| XLB | Materials |
| XLU | Utilities |
| XLRE | Real Estate |
| XLC | Comm. Services |
| GLD | Gold |
| SLV | Silver |
| CPER | Copper |
| URA | Uranium |
| ICLN | Clean Energy |
| GDX | Gold Miners |
| BTC | Bitcoin |
| ETH | Ethereum |
Market Regime Results
How the strategy performed in different market conditions, including 2023 when it significantly underperformed.
| Period | Strategy | SPY |
|---|---|---|
| 2008 Financial Crisis | -4.6% | -40.4% |
| 2022 Bear Market | +11.6% | -16.6% |
| 2023 AI Rally | -2.8% | +24.3% |
| 2024 | +44.4% | +28.8% |
Why ETFs Instead of Individual Stocks
Individual stock selection introduces survivorship bias. Backtests that include stocks that exist today will overstate past performance because they exclude all the companies that failed or were delisted. ETFs solve this: XLK holds every technology stock in the S&P 500, and the ETF itself won't go to zero because a constituent fails.
More importantly, the research showed that adding individual stocks to the rotation universe actually reduced CAGR. Sector ETFs capture the momentum factor at the theme level, where it's most reliable. Individual stocks introduce idiosyncratic risk that noise out the signal.
Live System
See the current rotation picks
The rankings update daily. The full picks with position weights and rebalance alerts are available on paid plans. 30-day free trial on Premium.