A Case for Index ETF Sector Rotation with Relative Strength
This paper by Scowcroft and Sefton found that, when it comes to large-cap stocks, price momentum is largely driven by the momentum of a stocks broader industry sector and not by the momentum of the individual stock itself. It makes a case for applying relative strength for sector rotation via index ETFs.
Understanding Momentum
Abstract:
The extensive literature on price momentum effects is a potential source of confusion for portfolio managers because conflicting explanations give rise to different implications for portfolio strategy. Analysis of the value-weighted large-capitalization universe represented by the MSCI World Index indicates that price momentum is driven largely by industry momentum, not individual-stock momentum, and that it is not a result of cross-sectional dispersion in industry mean returns or varying industry exposure to systematic risk. In a small-cap universe, stock-specific effects assume greater importance. For sample periods 1992-2003 and 1980-2003, value investors would have reduced risk by imposing sector neutrality on their portfolios whereas growth managers could have profited by relaxing sector constraints.
source: Sefton, James A. and Scowcroft, Alan, Understanding Momentum. Financial Analysts Journal, Vol. 61, No. 2, pp. 64-82, March/April 2005. Available at SSRN: http://ssrn.com/abstract=713864
