Faber sector rotation (Relative Strength Strategies for Investing)

May 2007 – Sep 2026	Strategy	SPY
Annual return (CAGR)	8.5%	10.7%
Worst drawdown	-20.2%	-55.2%
Sharpe ratio	0.68	0.62
Volatility	13.5%	19.7%
Annual return since publication (May 2010)	7.9%	14.0%

Jan 1960 – Sep 2026	Strategy	SPY
Annual return (CAGR)	11.2%	10.6%
Worst drawdown	-35.0%	-55.2%
Sharpe ratio	0.93	0.70
Volatility	12.2%	16.4%
Annual return since publication (May 2010)	7.9%	14.0%

Faber's sector rotation comes from Mebane Faber's 2010 paper "Relative Strength Strategies for Investing", which tested momentum on US industry sectors back to the 1920s. Each month it holds the three sectors with the strongest recent returns, a third each, and moves entirely to Treasury bills while the S&P 500 is below its 10-month average.

The idea#

Faber found that sectors that have outperformed over the past few months to a year tend to keep outperforming for a while, and that this held across every lookback he tried and in most decades. Owning the leading sectors beat owning all of them in most years of his study.

A sector rotation is still fully invested in stocks, so it falls with the market in a bear market. To address that, Faber added a "dynamic hedge": the whole portfolio moves to Treasury bills when the S&P 500 is below its 10-month average, the same trend rule as his 10-month moving average timing model.

How it works#

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

If the S&P 500 (SPY) is below its 10-month average, hold Treasury bills (BIL) and stop.
Otherwise, score nine sector funds by the average of their 1-, 3-, 6-, and 12-month returns: materials (XLB), energy (XLE), financials (XLF), industrials (XLI), technology (XLK), consumer staples (XLP), utilities (XLU), health care (XLV), and consumer discretionary (XLY).
Hold the three highest scores, a third each.

The paper ranks the ten Fama-French industry groups by an average that also includes the 9-month return. This version uses the nine original Select Sector SPDRs, which have traded since 1998, and a four-lookback average, since the builder has no custom multi-period average. Real estate and communication services funds arrived much later and are left out.

What the backtest shows#

The ETF-era test starts in mid-2007, once the Treasury bill fund has a history. Over that stretch the rotation compounded at about 8.5% a year with a worst drawdown of about 20%. The S&P 500 returned about 11% a year but fell more than half at its worst. A 60/40 portfolio returned about 8% with a worst drawdown of about a third. The rotation beat the S&P 500 on risk-adjusted return but trailed the 60/40 portfolio.

The trend filter did its job in 2008: the rotation gained about 2% while the S&P 500 lost 37%. But the filter also switched it out of stocks in brief corrections. Its worst drawdown ran from April to August 2011 and took until January 2013 to recover, and it made only about 1% in 2016. In 2023 it gained 6% while the S&P 500 gained 26%.

Since the 2010 paper it has returned about 8% a year.

With simulated sector history the test starts in 1960. Over that longer period it compounded at about 11% a year, ahead of the S&P 500, with a higher risk-adjusted return. It gained 8% in 1974 when the market lost a quarter. Its worst simulated drawdown, about 35%, came in the crash of October 1987, which happened too fast for a monthly trend check.

When it struggles#

Sudden crashes. The hedge looks at the S&P 500 once a month, so a fast fall like 1987 hits a fully invested portfolio.
Brief corrections. A dip below the 10-month average moves everything to bills, often near the bottom, and the portfolio can miss the rebound.
Narrow, mega-cap markets. When a few very large companies drive the S&P 500, as in 2023, three equal-weight sectors can trail badly.

Using it on Tactfolio#

The live strategy above runs these rules on daily data, with a 210-session average standing in for ten month-ends. Copy it to hold one or two sectors, rank on a single lookback such as 3 months, or add XLRE and XLC for a shorter but complete sector list.

Year by year

Year	Strategy	SPY
2026*	19.8%	14.0%
2025	4.8%	17.7%
2024	14.3%	24.9%
2023	5.9%	26.2%
2022	-2.2%	-18.2%
2021	14.1%	28.7%
2020	15.9%	18.3%
2019	13.3%	31.2%
2018	-4.7%	-4.6%
2017	16.0%	21.7%
2016	1.4%	12.0%
2015	-6.8%	1.2%
2014	6.2%	13.5%
2013	31.1%	32.3%
2012	7.9%	16.0%
2011	-1.4%	1.9%
2010	13.3%	15.1%
2009	19.9%	26.4%
2008	1.6%	-36.8%
2007*	2.0%	-3.4%

Year	Strategy	SPY
2026*	19.8%	14.0%
2025	4.8%	17.7%
2024	14.3%	24.9%
2023	5.9%	26.2%
2022	-2.2%	-18.2%
2021	14.1%	28.7%
2020	15.9%	18.3%
2019	13.3%	31.2%
2018	-4.7%	-4.6%
2017	16.0%	21.7%
2016	1.4%	12.0%
2015	-6.8%	1.2%
2014	6.2%	13.5%
2013	31.1%	32.3%
2012	7.9%	16.0%
2011	-1.4%	1.9%
2010	13.3%	15.1%
2009	19.9%	26.4%
2008	1.6%	-36.8%
2007	12.9%	5.1%
2006	11.5%	15.8%
2005	17.1%	4.8%
2004	13.2%	10.7%
2003	19.3%	28.2%
2002	-1.6%	-21.6%
2001	3.3%	-11.8%
2000	-8.1%	-9.7%
1999	27.6%	20.4%
1998	11.2%	28.7%
1997	21.6%	33.5%
1996	13.6%	22.5%
1995	40.6%	38.0%
1994	8.8%	0.4%
1993	14.9%	9.7%
1992	6.0%	7.6%
1991	23.5%	30.3%
1990	-11.1%	-3.2%
1989	29.7%	31.5%
1988	5.5%	16.4%
1987	-4.8%	5.1%
1986	19.6%	18.6%
1985	32.0%	31.6%
1984	8.8%	6.2%
1983	16.3%	22.4%
1982	36.6%	21.6%
1981	-7.1%	-4.9%
1980	22.5%	32.4%
1979	19.0%	18.3%
1978	-0.3%	6.5%
1977	-0.4%	-7.2%
1976	36.9%	23.8%
1975	19.4%	37.1%
1974	8.0%	-26.5%
1973	-12.4%	-14.7%
1972	18.9%	18.9%
1971	6.9%	14.1%
1970	15.5%	3.9%
1969	-8.8%	-8.4%
1968	16.1%	10.9%
1967	25.6%	23.8%
1966	3.1%	-10.1%
1965	19.8%	12.4%
1964	15.9%	16.4%
1963	21.8%	22.7%
1962	-1.1%	-8.8%
1961	33.2%	26.8%
1960*	-1.0%	0.4%

* Partial year.

The rules as implemented

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

Sources and caveats

Mebane Faber, Relative Strength Strategies for Investing (2010)

Top 3 sectors, equal weight, with the paper's dynamic hedge: 100% Treasury bills while the S&P 500 is below its 10-month average.
The paper ranks by the average of the 1-, 3-, 6-, 9-, and 12-month total returns; this version uses the 1-, 3-, 6-, and 12-month average, which has no 9-month term. Momentum is the plain average of the 1-, 3-, 6-, and 12-month total returns, with months counted as 21 trading sessions rather than calendar month-ends.
The nine original Select Sector SPDRs (XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY) stand in for the paper's ten Fama-French industry portfolios; real estate (XLRE) and communication services (XLC) arrived in 2015 and 2018 and are left out to keep the history. SPY stands in for the S&P 500 and BIL for Treasury bills.
Faber compares each month-end close with the average of the last ten month-end closes; this version uses the daily 210-session average, the closest daily equivalent.
Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is Faber's sector rotation strategy?#

It is Mebane Faber's relative strength model for US sectors: hold the three sectors with the strongest recent returns, and move to Treasury bills when the S&P 500 is below its 10-month moving average.

What ETFs does the sector rotation use?#

The nine original Select Sector SPDRs (XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY), with SPY for the trend test and BIL as cash.

How is it different from dual momentum?#

Dual Momentum switches between US stocks, foreign stocks, and bonds on 12-month returns. Faber's rotation stays inside US stocks, picks three sectors on a blend of shorter and longer lookbacks, and uses a moving average rather than Treasury bill returns to step aside.

Does sector rotation still work?#

Since the 2010 paper it has returned about 8% a year. Over the whole ETF-era test it beat the S&P 500 on risk-adjusted return, with much smaller losses, but trailed a 60/40 portfolio. The live record on Tactfolio shows how it is doing now.