Sector Momentum

Abstract

This article examines the monthly returns of nine Select Sector SPDRs and finds historically that buying past outperforming sectors and selling past underperforming sectors produces economically and statistically significant profits. Investors may be able to benefit not only from SPDRs’ low fees, tax efficiency, and trading flexibility but also exploit SPDRs as asset allocation tools to earn excess returns on sector momentum. For robustness checks, we test sector momentum investing strategies on CRSP-listed individual stocks between January 1963 and December 2008 using the Global Industry Classifications Standard and also find statistically significant payoffs. Momentum strategies on sector appear profitable even after potential transaction costs and systematic risk adjustments.