A Century of Profitable Industry Trends

34 Pages Posted: 14 Jun 2024

See all articles by Carlo Zarattini

Carlo Zarattini

Concretum Research

Gary Antonacci

Portfolio Management Consultants

Date Written: June 07, 2024


This paper evaluates the profitability of an industry-based long-only trend-following portfolio. Utilizing 48 industry portfolios from 1926 to 2024, our analysis explores the model's profitability over a century, highlighting its adaptability and effectiveness across diverse market epochs. We assess the overall profitability of the model and examine the distribution of long-term returns and associated risks. Our analysis includes the impact of individual industry contributions on overall portfolio performance, focusing on the frequency and average profitability of trades at both the portfolio and industry levels. The Timing Industry strategy achieves an average annual return of 18.2% with an annual volatility of 12.6%, resulting in a Sharpe Ratio of 1.39, compared to the US equity market's 9.7% return, 17.1% volatility, and 0.63 Sharpe Ratio. The model's outperformance is underscored by an annualized alpha of 10.9%, with the timing strategy reducing drawdown by almost 60% compared to a passive long exposure. Further investigations reveal the active strategy's ability to fully participate during market upswings while significantly limiting exposure during downturns. In the final section, we introduce 31 sector ETFs provided by State Street Global Advisors and backtest the same trading methodology over the last 20 years. The ETFs successfully replicate the model's exposure and returns. We also assess the impact of commissions and slippage, demonstrating that the active timing strategy remains largely profitable even with high trading costs.

Keywords: Momentum, Trend-Following, Dual Momentum, Industry Rotation, Algo Trading

Suggested Citation

Zarattini, Carlo and Antonacci, Gary, A Century of Profitable Industry Trends (June 07, 2024). Available at SSRN: https://ssrn.com/abstract=4857230 or http://dx.doi.org/10.2139/ssrn.4857230

Carlo Zarattini (Contact Author)

Concretum Research

LUGANO, 6900

Gary Antonacci

Portfolio Management Consultants ( email )

United States

HOME PAGE: http://optimalmomentum.com

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