Navigating Sector Momentum: Evaluating Performance in the US and Global ETFs for Retail Investors

Abstract

Modern day investing comes with too many options and complexities for non-professional investors. An easy way for them to earn acceptable returns is investing in market index exchange-traded funds (ETFs). However, the previous research suggests that they can achieve superior results by using a simple sector momentum strategy. The aim of this study is to examine whether those conclusions remain when a different data set is used as well as to assess the performance attribution of such a strategy. The research is based on two sets of sector ETFs, which are focused on the US market and on the global market, in order to investigate whether the results are applicable in both cases. For each of them the performance measures were calculated, and the factor analysis was performed. The results suggest that the sector momentum strategies achieve superior results than the benchmark, though there is not one universally optimal strategy for every investor and for every investment opportunity set. The factor analysis confirms that the strategy generates alpha and that its performance cannot be explained by traditional factors fully. Therefore, the study further supports the use of sector momentum investing, especially for retail investors, though it has its limitations, e.g. the neglect of transaction costs.