EAA Piloting Quarterly Sector Rotation With C(r)ash Protection

This post will cover a detailed look into quarterly sector investing using the EAA-model previously introduced (see here). For the sector investor Fidelity is the place to be. Currently Fidelity offers 46 sector mutual funds. Lots of these funds have at least 21 years of historical prices available. Those are the ones collected in the universe under investigation in this post to allow for comparability with prior backtests.

Fidelity Sector Select Universe

The above stated data history requirement is met by 34 from the 46 available sector funds. With these 34 funds not only 10 economical sectors plus precious metals are covered, but it also ensures for a well diversified basket to select investments from.

In the above table funds are sorted on sectors. Furthermore the performance of each fund over 1995 - 2014 is shown and broken down into the average yearly return (R), the fund's volatility (V) and the worst draw down (D) during those 20 years.

As C(r)ash Protection Fund another Fidelity mutual fund is used: FIBIX. However, since FIBIX' data falls short on the mandatory data history, it was synthetically extended using Vanguard's VFITX data (see here or here).

Backtests are performed with AmiBroker's Professional edition using monthly total return data obtained from Yahoo! Finance. Below the performance is shown for monthly as well as quarterly portfolio re-balancing as piloted by the EAA-model in Equal Weighted Hegded mode (see here). Portfolios are reformed at the end of each month/quarter. Transaction costs are not taken into consideration. In the table the monthly/quarterly re-balanced Equal Weight portfolios of the 34 asset universe are used as benchmarks along with a 20 year Buy&Hold investment in SPY.

The monthly strategy allocates capital to a maximum of 6 funds (in accordance with the round( sqrt( 34 ) ) proposition implemented in the EAA-code) supplemented by a proportional fraction of portfolio capital to the cash proxy fund (here: FIBIX) for every asset with non-positive return (the c(r)ash protection routine). To account for the higher volatility related to the lower re-balancing frequency of the quarterly strategy a maximum of 7 funds is applied instead. However with a maximum of 8 selection the volatility of the quarterly strategy would have been a near match compared to the monthly strategy, but only at the cost of lower CAR and worser MaxDD.

Note the monthly metrics are just for illustration purposes, since with monthly reforms the investor most likely would risk incurring short-term trading fees quite frequently due to the redemption periods for the Fidelity Select funds stretching from 30 until 90 days.

Quarterly Sector Rotation In Detail

Fidelity 34+1 Quarterly Strategy: equity graph with key performance indicators
Fidelity 34+1 Quarterly Strategy: yearly return chart
Fidelity 34+1 Quarterly Strategy: monthly profit table with yearly CARs and MaxDDs
Fidelity 34+1 Quarterly Strategy:monthly draw down graph
Fidelity 34+1 Quarterly Strategy: capital allocation per fund (%)
Fidelity 34+1 Quarterly Strategy:profit contribution per fund
Fidelity 34+1 Quarterly Strategy: Manhattan allocation diagram with fund selection for every quarter

Please feel welcome to put forward idea's regarding broad and diversified universes of ETFs (N >= 50) for backtesting and do leave remarks and suggestions in the comment section below.