Monthly Momentum Strategy (ETF Sector Rotation Strategy In EEM, SPY, And TLT)

This article presents an ETF rotation strategy. Sector rotation is popular and this is not without merit. The idea is to be in the sector that shows the best recent momentum. Today we present an ETF momentum rotation trading strategy based on monthly data in EEM, SPY, and TLT.

In this short article, we give an example of a very easy and simple ETF rotation strategy among SPY (S&P 500), TLT (Treasury bonds), and EEM (MSCI Emerging Markets) that has worked pretty well over the last two decades. It has beaten “buy and hold” with lower drawdowns. That was until 2022, which was a very bad year for the strategy.

Table of contents:

Momentum and sector rotation in ETFs (TLT, SPY, and EEM)

SPY is an ETF that tracks the S&P 500, TLT tracks the 20-year Treasury bonds, while EEM tracks the MSCI Emerging Markets Index.

Why did we choose these three ETFs?

SPY was chosen because it’s the most important stock index on the planet. The S&P 500 is, by far, the most followed stock index on the planet.

The EEM was chosen because it’s one of the markets that correlate less with the SPY. Emerging markets often go their own ways compared to the stock markets of the Western world.

Lastly, TLT was included because it’s a “safe haven”. When the stock markets turn ugly, many seek refuge in the safe harbor of US long-term Treasury bonds.

That’s the theory. Does it hold up in practice?

Our sector rotation strategy in TLT, SPY, and EEM shows solid results

Yes, the theory held up pretty well in the backtest we did over two decades. This is what we did (trading rules and settings):

Trading Rules

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It’s based on monthly quotes in the ETFs SPY, EEM, and TLT.
Every month rank them based on last month’s performance and go long the best performing ETF.
Hold for on