FV: Sector Rotation

Sector rotation sounds simple: own the strongest areas of the market and avoid the weakest.

The results, however, are anything but uniform.

A review of six managed and model-based sector-rotation strategies, as shown in the table below, found outcomes ranging from modest returns with limited drawdowns to triple-digit gains with much larger drawdowns.

Model # Portfolio Name Ticker or ID 1-year total return 1-year max drawdown 10-year total return (annualized) 10-year max drawdown 1 Sector Rotation Fund NAVFX 16.3% 6.3% 11.6% 22.3% 2 The First Trust Dorsey Wright Focus 5 FV 26.5% 9.0% 13.2% 20.1% 3 Top 3 Sector Rotation t.srt3 36.0% 4.4% 12.6% 20.2% 4 Top 5 Sector Rotation t.srt5 54.4% 3.2% 18.2% 16.3% 5 Relative Strength Sector Rotation t.srrs 18.3% 4.3% 11.2% 11.9% 6 Quartile Sector Rotation t.srqr 114.0% 13.9% 29.3% 50.7% – Benchmark: SPDR S&P 500 ETF SPY 29.8% 5.8% 15.6% 23.9% Six Sector Rotation Portfolios, with results through May 2026 Managed Funds Did Not Deliver A Clear Edge Sector Rotation Model 1 is the aptly named mutual fund “Sector Rotation Fund” (NAVFX), managed by Grimaldi Portfolio Solutions.

The fund charges 2.04% annually, including acquired-fund expenses, according to its prospectus .

Its strategy uses sector, broad-market, international and inverse ETFs, and the fund reported portfolio turnover of 136.35% for its latest fiscal year.

In the risk-and-return review, NAVFX did not show a clear advantage over the S&P 500, based on a comparison to the SPDR S&P 500 ETF (NYSE: SPY ) .

NAVFX’s average return was 4 percentage points below SPY, and NAVFX’s max drawdown was only 1.6% less than SPY over the past 10 years.

That’s not enough of a risk reduction to justify the lower return.

Sector Rotation Model 2 is the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) .

As an exchange-traded fund, it’s less expensive, with a 0.89% total expense ratio.

It’s a fund-of-funds, holding five First Trust sector or industry ETFs.

But convenience has not translated into benchmark-beating performance.

First Trust reported a 10-year annualized NAV return of 13.2% through May 2026, compared with 15.6% for the S&P 500 Index.

More Holdings Improved The Momentum Model Sector Rotation Model 3 is the Top 3 Sector Rotation (ID: t.srt3).

This model portfolio’s algorithm ranks a set of Fidelity Select sector funds by momentum over the past year.

Then the model picks the top three funds to buy.

Over the past 10 years, this “Top 3 Sector” model has returned 12.6% (annualized) with a maximum drawdown of 20.2%.

Sector Rotation Model 4 is similar to Model #3, but holds the top five ranked sector funds.

This more diversified approach produced a stronger historical result.

Over the past 10 years, the Top 5 model returned 18.2% annualized with a 16.3% maximum drawdown.

So adding two holdings improved return and reduced drawdown.

This model portfolio also beats NAVFX, FV, and t.srt3 in terms of both total return and risk (as measured by maximum drawdown).

Defense Versus Concentration Sector Rotation Model 5 is a Relative Strength Sector Rotation Portfolio (ID: t.srrs) which uses a set of sector ETFs as its investment universe.

This approach applies a 10-month return measure and a 10-month moving average.

Funds that fall below the moving average are excluded, and the portfolio can move partly or entirely to cash if no sectors are above their 10-month moving averages.

Its 10-year historical result was an 11.2% annualized return with a 11.9% maximum drawdown.

It has lagged the S&P 500 over the last five years, but its defensive rule materially reduced the worst historical decline.

Its maximum drawdown is the lowest in this list.

Sector Rotation Model 6 is the Quartile Sector Rotation Portfolio (ID: t.srqr).

This model lies at the other extreme of risk and return.

This model selects from over 100 sector funds and owns only one at a time.

This concentrated approach has produced a quite notable 114% one-year gain and a 29.3% annualized 10-year return.

Over the past decade, t.srqr has far outpaced major benchmarks, as the chart below shows.

However, in the past 10 years it’s also seen a 50.7% maximum drawdown (based on month-end total return).

10-Year Normalized Total Return: t.srqr vs.