On the Significance of Returns Achieved with Equal Sector Weighted Portfolios

Date created
2011-08
Authors/Contributors
Abstract
For years, the market portfolio has been a bastion of long term returns for the passive investor. With the launch of SSGA’s Select Sector SPDR ETFs has come evidence that a portfolio weighted equally among the sectors of the S&P 500 has outperformed the market over the past 10 years on both an absolute and risk adjusted basis. In this paper we test the outperformance of such an equally weighted portfolio against an expanded dataset to that of Sturm (2010) and that offered by the SPDR marketing material. By using sector index data for the S&P 500, the S&P TSX, and an approximation for an expanded set of Select Sector SPDR ETF returns, we find that returns of Equal Sector portfolios tend to be less volatile than the market, and also that the Equal Sector strategy tends to outperform on a risk-adjusted basis during heightened market volatility. But, we also find that the periodic excess returns of an Equal Sector strategy are not statistically significant over the period of December 31, 1989 to December 31, 2009, suggesting that excess returns of an equal sector strategy may be transitory, and therefore unreliable.
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FRM Project-Simon Fraser University
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