Beta Rotation Strategy (utilities vs. the market)

Jan 1999 – Sep 2026	Strategy	SPY
Annual return (CAGR)	6.7%	8.8%
Worst drawdown	-51.9%	-55.2%
Sharpe ratio	0.45	0.53
Volatility	18.4%	19.2%
Annual return since publication (Apr 2014)	8.1%	13.9%

Jul 1926 – Sep 2026	Strategy	SPY
Annual return (CAGR)	10.8%	10.4%
Worst drawdown	-85.6%	-83.7%
Sharpe ratio	0.66	0.63
Volatility	18.0%	18.5%
Annual return since publication (Apr 2014)	8.1%	13.9%

The Beta Rotation Strategy (BRS) comes from Charles Bilello and Michael Gayed's paper "An Intermarket Approach to Beta Rotation: The Strategy, Signal and Power of Utilities", winner of the 2014 Charles H. Dow Award. Every week it compares utility stocks with the whole market over the past four weeks. If utilities did better, it holds utilities for the next week; otherwise it holds the market.

The idea#

Utilities are a defensive, bond-like corner of the stock market. Market technicians have long watched them as a leading indicator. When investors grow cautious, or interest rates start to fall ahead of a slowdown, utilities tend to outperform before the broader market weakens.

Bilello and Gayed turned that observation into a rotation. When utilities lead, the strategy moves into them, trading some upside for a lower-beta, steadier holding. When utilities lag, risk appetite is healthy, and the strategy holds the market. It is always fully invested in stocks; only the kind of stocks changes.

How it works#

At the close of the last trading day of each week:

Compare the total return of the utilities sector (XLU) with that of the S&P 500 (SPY) over the last 20 trading days, about four weeks.
If XLU returned more, hold XLU for the next week.
Otherwise, hold SPY.

A rising ratio of utilities to the market is the same thing as utilities returning more than the market, so this matches the paper's price-ratio test.

What the backtest shows#

With real prices the test starts in early 1999, when the sector ETFs launched. Since then the strategy returned about 7% a year, against about 9% for the S&P 500 and 8% for a 60/40 portfolio. It trailed both on risk-adjusted return, and its worst drawdown, about 52% from December 2007 to March 2009, was nearly as deep as the market's, because utilities fell hard in that crash too. It recovered in May 2011.

It had good years when defensive stocks led. It lost 1% in 2000 while the S&P 500 lost 10%, and beat the market by about 11 percentage points in 2005 and 8 in 2007. It lagged badly when growth stocks led: it gained 1% in 2020 against 18% for the market and lost 2% in 2023 while the market gained 26%.

Since the paper appeared in 2014 it has returned about 8% a year, with a slightly better risk-adjusted return than over the whole period and a worst drawdown of about 39%.

With simulated history, built from utilities sector returns, the test starts in 1926, close to the paper's own sample. Over that span it returned about 10.8% a year, just ahead of the S&P 500's 10.4%, with a slightly better risk-adjusted return. That is a much smaller edge than the paper reported. The difference may come partly from the S&P 500 standing in for the paper's total-market index and from measuring four weeks as 20 trading days. The worst simulated drawdown, 86% from 1929 to 1932, was about as deep as the market's.

When it struggles#

Markets led by growth stocks. When technology and other high-beta stocks drive the market, utilities lag and the strategy often sits in the market at best, or in utilities at the wrong time.
Crashes that hit everything. Utilities are still stocks. In 2008 the strategy lost 36%, about as much as the market.
Frequent switching. A four-week signal checked weekly can change its mind often, and each switch has a cost.

Using it on Tactfolio#

The live strategy runs the rule each week on XLU and SPY. Copy it to try a total-market fund such as VTI, a different lookback, or Treasuries instead of utilities as the defensive side.

Year by year

Year	Strategy	SPY
2026*	15.5%	14.0%
2025	14.1%	17.7%
2024	31.3%	24.9%
2023	-1.5%	26.2%
2022	-22.8%	-18.2%
2021	19.7%	28.7%
2020	1.0%	18.3%
2019	30.8%	31.2%
2018	0.3%	-4.6%
2017	20.6%	21.7%
2016	1.5%	12.0%
2015	-4.4%	1.2%
2014	8.0%	13.5%
2013	28.2%	32.3%
2012	16.3%	16.0%
2011	5.1%	1.9%
2010	13.9%	15.1%
2009	32.1%	26.4%
2008	-36.0%	-36.8%
2007	13.5%	5.1%
2006	15.8%	15.8%
2005	16.1%	4.8%
2004	13.7%	10.7%
2003	26.4%	28.2%
2002	-25.5%	-21.6%
2001	-14.3%	-11.8%
2000	-1.1%	-9.7%
1999*	10.2%	21.1%

Year	Strategy	SPY
2026*	15.5%	14.0%
2025	14.1%	17.7%
2024	31.3%	24.9%
2023	-1.5%	26.2%
2022	-22.8%	-18.2%
2021	19.7%	28.7%
2020	1.0%	18.3%
2019	30.8%	31.2%
2018	0.3%	-4.6%
2017	20.6%	21.7%
2016	1.5%	12.0%
2015	-4.4%	1.2%
2014	8.0%	13.5%
2013	28.2%	32.3%
2012	16.3%	16.0%
2011	5.1%	1.9%
2010	13.9%	15.1%
2009	32.1%	26.4%
2008	-36.0%	-36.8%
2007	13.5%	5.1%
2006	15.8%	15.8%
2005	16.1%	4.8%
2004	13.7%	10.7%
2003	26.4%	28.2%
2002	-25.5%	-21.6%
2001	-14.3%	-11.8%
2000	-1.1%	-9.7%
1999	9.4%	20.4%
1998	29.2%	28.7%
1997	37.0%	33.5%
1996	16.8%	22.5%
1995	30.3%	38.0%
1994	-9.8%	0.4%
1993	18.5%	9.7%
1992	12.3%	7.6%
1991	18.6%	30.3%
1990	2.9%	-3.2%
1989	28.7%	31.5%
1988	5.6%	16.4%
1987	15.7%	5.1%
1986	23.9%	18.6%
1985	29.2%	31.6%
1984	5.8%	6.2%
1983	18.5%	22.4%
1982	22.8%	21.6%
1981	5.4%	-4.9%
1980	31.8%	32.4%
1979	18.2%	18.3%
1978	2.0%	6.5%
1977	6.9%	-7.2%
1976	31.0%	23.8%
1975	58.9%	37.1%
1974	-15.1%	-26.5%
1973	-14.9%	-14.7%
1972	11.8%	18.9%
1971	17.4%	14.1%
1970	16.8%	3.9%
1969	-8.6%	-8.4%
1968	11.8%	10.9%
1967	6.7%	23.8%
1966	-5.1%	-10.1%
1965	10.7%	12.4%
1964	15.6%	16.4%
1963	17.0%	22.7%
1962	-5.3%	-8.8%
1961	25.9%	26.8%
1960	13.8%	0.4%
1959	8.5%	12.0%
1958	42.1%	43.1%
1957	10.5%	-10.8%
1956	8.3%	6.3%
1955	15.7%	31.4%
1954	42.0%	52.4%
1953	6.4%	-1.0%
1952	23.9%	18.3%
1951	17.9%	23.7%
1950	31.5%	31.5%
1949	33.0%	19.0%
1948	0.2%	5.6%
1947	-1.3%	5.7%
1946	-2.3%	-8.0%
1945	52.9%	36.2%
1944	15.4%	19.6%
1943	46.9%	25.9%
1942	18.7%	20.3%
1941	-17.4%	-11.5%
1940	-13.3%	-9.6%
1939	10.3%	-0.2%
1938	42.5%	30.5%
1937	-27.8%	-34.9%
1936	36.0%	33.8%
1935	29.5%	47.8%
1934	-2.5%	-0.3%
1933	29.3%	50.9%
1932	-17.2%	-8.2%
1931	-43.9%	-43.2%
1930	-22.5%	-24.9%
1929	11.2%	-8.6%
1928	62.0%	44.2%
1927	23.7%	28.3%
1926*	1.1%	3.3%

* Partial year.

The rules as implemented

This is the exact tree Tactfolio runs, rebalanced weekly with signals and trades at the close. Open it to inspect or copy it.

Sources and caveats

Charles V. Bilello and Michael A. Gayed, An Intermarket Approach to Beta Rotation: The Strategy, Signal and Power of Utilities (2014)

XLU and SPY stand in for the Fama/French utilities and total US market total return series. A rising utilities-to-market ratio over four weeks is tested as XLU's 20-session return beating SPY's.
Four weeks is taken as 20 sessions, so weeks with a holiday reach back one extra day.
Signals and trades use the close of the last trading day of each week, as in the source.

Common questions#

What is the Beta Rotation Strategy?#

It is Bilello and Gayed's 2014 rule that switches each week between utility stocks and the broad market. It holds utilities when they have outperformed the market over the past four weeks, and the market otherwise.

Why do utilities predict stock market weakness?#

Utilities are defensive and sensitive to interest rates. They tend to outperform when investors turn cautious or rates fall ahead of a slowdown, so their relative strength can show rising risk before the broad market reacts.

What ETFs does the Beta Rotation Strategy use?#

XLU for the utilities sector and SPY for the market. The paper used long-run utilities and total-market index data.

Does the Beta Rotation Strategy still work?#

Since the paper appeared in 2014 it has returned about 8% a year and trailed the S&P 500 in most calendar years, mostly because growth stocks led the market for long stretches. The live record on Tactfolio shows how it is doing now.