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Live Webinar June 14 2PM EST
Alpha/Beta Series: Sector Strategies
Sponsored by:
Today’s Webinar: Alpha/Beta
Mebane Faber Chief Investment Office Cambria
• How To Evaluate Sectors • How To Evaluate Sector ETFs
Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse
David Botset Senior V.P., ETFs Guggenheim
Combining Momentum Strategies
• “A Quantitative Approach to Tactical Asset Allocation” published in the Spring 2007 issue of The Journal of Wealth Management. •“Relative Strength Strategies for Investing”, April 2010.
Combining Momentum Strategies
1. Trendfollowing
2. Relative Strength
3. Combining the Two
Risk Management
"The first rule is not to lose. The second rule is not to forget the first rule.”
-Warren Buffett
I can calculate the motion of heavenly bodies…but not the madness of men
6 Source: Marc Faber, Gloom Boom Doom
Trendfollowing Hypothetical Buy & Sell Signals
Source: Global Financial Data
Trendfollowing 1928 - 2009
Source: Global Financial Data
• 10-month simple moving average.
• Rebalances monthly.
• Moves to cash (T-Bills) when out of the market.
• 10 US Sectors
Trendfollowing, 1928-2009
Relative Strength 1928 - 2009
Source: Global Financial Data
• 1,3,6,9,12 month relative strength (total return).
• Rebalances monthly.
• 3 – 6 % outperformance per year.
Relative Strength, 1928-2009
Combining Relative Strength & Trend 1928 - 2009
Source: Global Financial Data
• Rank by 1,3,6,9,12 month relative strength (total return).
• Moves to cash if below long term moving average.
• Rebalances monthly.
Where Are We Now?
Source: Global Financial Data
1.Energy
2.Healthcare
3.Real Estate
Improvements
Source: Global Financial Data
1.More asset classes.
2.Granularity within asset class.
3.Multiple time frames.
4.Other factors, Value, Economic.
Sector Beta:
Understanding Classifications & Evaluating ETFs
Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse
The Jellybean Problem
Introduction to Sector Strategies GICS vs ICB
GICS ICB
Level 1 10 Sectors 10 Industries
Level 2 24 Industry Groups 19 Supersectors
Level 3 68 Industries 41 Sectors
Level 4 154 Subindustries 114 Subsectors
Different Names, Similar Structures
Sectors vs Industries
GICS Sectors ICB Industries
Consumer Discretionary Consumer Services
Consumer Staples Consumer Goods
Energy Oil & Gas
Financials Financial
Health Care Health Care
Industrials Industrial
Information Technology Technology
Materials Basic Materials
Telecommunication Services Telecommunications
Utilities Utilities
Thomson Reuters Business Classification (TRBC)
GICS vs ICB Breakdown of S&P 500
0% 5% 10% 15% 20%
Con Discret/Services
Con Staples/Goods
Energy/Oil & Gas
Financials
Health Care
Industrials
IT/Tech
Materials
Telecom
Utilities
GICS, ICB & TRBC Breakdown of SPY
ICB SPY
GICS SPY
GICS vs ICB Breakdown of MSCI EAFE
0% 5% 10% 15% 20% 25%
Con Discret/Services
Con Staples/Goods
Energy/Oil & Gas
Financials
Health Care
Industrials
IT/Tech
Materials
Telecom
Utilities
GICS vs ICB Breakdown of MSCI EAFE
ICB EFA
GICS EFA
GICS vs. ICB Performance: Consumer Splits
-60
-40
-20
0
20
40
60
80
Pe
rce
nt
Ret
urn
Consumer Sector ETFs TRR
IYC IYK XLP XLY
Sector Correlations
GICS vs. ICB Performance: Energy
-30
-20
-10
0
10
20
30
40
50
60
70
Pe
rce
nt
Ret
urn
Energy Sector ETFs TRR
IYE XLE
GICS vs. ICB Performance: Financials
-100
-80
-60
-40
-20
0
20
40
Pe
rce
nt
Ret
urn
Financial Sector ETFs TRR
IYF XLF
Industry Breakdown: SPY through the Lens of TRBC
Name Ticker GICS ICB Industry TRBC Sector
Aetna Inc New AET Health Care Health Care FINANCIALS
Cigna Corp CI Health Care Health Care FINANCIALS
Humana Inc HUM Health Care Health Care FINANCIALS
Wellpoint Inc WLP Health Care Health Care FINANCIALS
Mastercard Inc MA IT Financials FINANCIALS
Visa Inc V IT Financials FINANCIALS
Fidelity Natl Information FIS IT Industrials FINANCIALS
Dun & Bradstreet Corp Del N DNB Industrials Consumer Services FINANCIALS
SPY TRBC vs GICS: Non-Financials
Name Ticker GICS TRBC Sector
Plum Creek Timber Co Inc PCL Financials BASIC MATERIALS
Weyerhaeuser Co WY Financials BASIC MATERIALS
Host Hotels & Resorts Inc HST Financials CYCLICAL CONSUMER
Health Care Reit Inc HCN Financials HEALTHCARE
Hcp Inc HCP Financials HEALTHCARE
Ventas Inc VTR Financials HEALTHCARE
Moodys Corp MCO Financials INDUSTRIALS
Public Storage PSA Financials INDUSTRIALS
Leucadia Natl Corp LUK Financials INDUSTRIALS
SPY TRBC vs ICB: Non-Financials
Name Ticker ICB TRBC Sector
Plum Creek Timber Co Inc PCL Financials BASIC MATERIALS
Weyerhaeuser Co WY Financials BASIC MATERIALS
Host Hotels & Resorts Inc HST Financials CYCLICAL CONSUMER
Health Care Reit Inc HCN Financials HEALTHCARE
Hcp Inc HCP Financials HEALTHCARE
Ventas Inc VTR Financials HEALTHCARE
Moodys Corp MCO Financials INDUSTRIALS
Public Storage PSA Financials INDUSTRIALS
Western Un Co WU Financials INDUSTRIALS
Financial ETFs: Performance
-50
-25
0
25
50
75
2009 2010 2011
Pe
rce
nt
Ret
urn
IYF XLF VFH FXO RYF PFI
Financial ETFs: Performance in a Bear Market
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
10
Oct-07 Apr-08 Oct-08
Pe
rce
nt
Ret
urn
10/10/07 - 3/9/2009
IYF XLF VFH FXO RYF PFI
The Difference? Holdings RYF PFI
ACE LIMITED 1.39% ACE Ltd. 2.53%
AMERICAN EXPRESS COMPANY
1.39% Ameriprise Financial Inc. 2.46%
AVALONBAY COMMUNITIES INC
1.43% CB Richard Ellis Group Inc. (Cl A)
2.46%
BOSTON PROPERTIES INC 1.43% CNA Financial Corp. 2.52%
CHUBB CORPORATION 1.41% Discover Financial Services 2.49%
EQUITY RESIDENTIAL 1.41% Franklin Resources Inc. 2.53%
MOODY'S CORPORATION 1.64% Moody's Corp. 2.79%
SIMON PROPERTY GROUP INC.
1.39% NYSE Euronext 2.52%
SLM CORPORATION 1.37% Prudential Financial Inc. 2.47%
VORNADO REALTY TRUST 1.38% Travelers Cos. Inc. 2.57%
Variety of Performance Stats: Financial ETFs
1 yr Perf Max
Return Min Return Sharpe Ratio Volatility
Max Drawdown
IYF 7.00 7.09 -7.20 0.61 19.12 -10.04
XLF 4.47 7.32 -7.62 0.49 20.32 -10.88
VFH 7.17 7.15 -7.52 0.62 19.49 -10.46
RYF 15.35 5.69 -7.86 1.01 18.80 -10.20
RWW 2.68 6.77 -7.58 0.35 20.58 -12.85
PFI 15.75 5.91 -5.47 1.13 16.42 -8.14
FXO 18.38 5.68 -5.82 1.33 15.98 -8.08
Biotech Performance
-50
-25
0
25
50
75
100
2007 2008 2009 2010 2011
Pe
rce
nt
Ret
urn
IBB BBH PBE XBI FBT
Sector Choices: Biotech Performance
Ticker Name
Bull Market 3/9/2009 - 5/31/2011
Bear Market 10/10/2007 -
3/9/2009
BBH Biotech HOLDRS 39.33% -3.35%
IBB iShares Nasdaq Biotechnology 86.28% -32.28%
PBE PowerShares Dynamic Biotech & Genome Portfolio 111.84% -44.76%
XBI SPDR S&P Biotech 72.02% -26.59%
FBT First Trust NYSE Arca Biotechnology 169.20% -36.64%
Theme Investing: Wind
-80
-70
-60
-50
-40
-30
-20
-10
0
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Pe
rce
nt
Ret
urn
FAN PWND
Sector Choices: Thematic Benchmarks: What Is Wind? Purity of Benchmark Rules
Sponsored by:
Any Questions?
Mebane Faber Chief Investment Office Cambria
Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse
David Botset Senior V.P., ETFs Guggenheim
Thank You
For more information: www.IndexUniverse.com www.cambriainvestments.com
www.mebanefaber.com
www.guggenheimfunds.com