There must be an unwritten rule that all asset class momentum traders eventually have to apply their techniques to the Fidelity Select Sector Funds as I suspect we have all fiddled with the idea and I am no exception.
I spent some time recently applying my momentum techniques to these funds as a “proof of concept”. In order to trade the Select Sector funds, an individual must have a Fidelity account. That isn’t a preferred option for some investors undoubtedly as most of us investors prefer to have the option to trade a much wider range of funds/ETF’s than those offered by only one company.
The results I present below are not quite achievable because commissions are not included. Also, the trades are executed at the closing price on the last trading day of each month but the ranking is performed based on the close of the last trading day of the month. Ideally the backtest would be performed based on the trades being executed on the first trading day of each month.
Please note that I did not include the Select Gold Portfolio Fund as it does not exhibit momentum tendencies. Other momentum traders have discovered likewise and do not include it in their models.
For the benchmark in the chart below I use the S&P 500 but, as I discuss later, I believe it is a little less than transparent to use that as a benchmark.
As you can see, my once-per-month momentum model using Fidelity Select Sector funds outpaces the S&P 500 by a very wide margin. In fact, the momentum model achieves a CAGR of 17.6% before commissions.
If you have read my previous month-end posts, you know that I always check to determine whether selection bias is a factor. In this case, we should check the performance of the funds against the S&P 500 to assess whether some of the outperformance in the above chart is the result of the Select Sector funds outpacing the S&P 500 without the application of any momentum techniques.
The “Average of All Funds” is based on investing equal dollar amounts in each of the funds each month. This would require rebalancing each month and therefore trading costs would be involved. However, this is meant to simply illustrate that the Select Sector funds outpaced the S&P 500 from 1988 to present.
The observation which the above chart presents and which I am pleased with is that my momentum techniques add value versus a buy-and-hold strategy for these funds. An investment of $100,000 starting in 1988 grows to $2,400,000 if invested equally in all the funds each month. On the other hand, an investment of $100,000 grows to $8,900,000 using my momentum techniques.
There is an aspect of this model which is troublesome for me and that is the maximum drawdown of 45%. I would not stick with a trading strategy that produces such a drawdown. Of course, we do have to keep in mind that this is an equity-only investing strategy but I prefer investing across various asset classes which, as my research demonstrates, provides better returns and smaller drawdowns.