Outperform The Market With Sector ETFs by Todd and Steven Winkler
The Select Sector Strategy
Here’s a long-term strategy that is similar to the dogs of
the Dow strategy, except that it uses Select Sector ETFs.
Find out how this strategy can be used to outperform the
The dogs of the Dow is a well-known investment strategy
that was originally introduced in 1991 by Michael B.
O’Higgins and John Downes in their book Beating The Dow.
The dogs of the Dow strategy involves the purchase of equal
dollar amounts of the 10 Dow Jones Industrial Average (DJIA)
stocks with the highest dividend yields and holding onto those
companies for exactly one year. At the end of the year, the
portfolio is adjusted as the cycle is repeated, the goal being
to outperform the DJIA.
Whereas the dogs of the Dow strategy has proven itself to be viable and robust, we are proposing a similar yet alternative stock
investment method, which we call the Select Sector strategy. It
invests in market sector exchange traded funds (ETFs), as opposed
to individual stocks, in an effort to outperform its broader
stock market benchmark, the S&P 500 index. This strategy
may appeal to investors who are more comfortable investing
in market sectors as opposed to a relatively small number of
individual company stocks as with the dogs strategy, or who think
that the Select Sector strategy is simply superior. Our research
indicates that the Select Sector strategy has indeed been able to
convincingly outperform a proxy of its benchmark, the SPDR
S&P 500 ETF (SPY), as well as the dogs strategy.
Our portfolio of candidate ETFs is limited to the nine SPDR
Select Sector ETFs underwritten by State Street Global
Advisors. The complete list of these ETFs, along with their
ticker symbols and accompanying percentage composition of the S&P 500 index, are given in Figure 1.
The nine sectors are as follows: materials,
energy, industrial, financial, technology,
consumer staples, utilities, health care, and
Specifically, our Select Sector strategy involves
the purchase of equal dollar amounts
of the three worst-performing of these nine
sectors in percentage terms from the prior
year and holding them for one year. At the
end of the year, the cycle is repeated with
the portfolio adjusted accordingly. As with
both this and the dogs strategy, the thought
process is that there are repeating business
cycles in which relatively weaker periods
of stock performance are followed by
relatively stronger periods.