Analyzing Historical Performance in Sector ETFs

Jul 18, 2018

By: Sage Anderson

When managing our portfolios, it's easy to get caught in sectors and symbols that we know. However, that doesn't necessarily mean we’re finding the most optimal opportunities available at any given time.

If you've been looking to expand the horizons of your portfolio, a recent episode of Market Measures will undoubtedly be right up your alley.

The focus of the show is an examination of the different sectors in the S&P 500, as well as an analysis of historical performance and risk.

Specifically, the team looks to rank the overall performance of a short premium approach in the different sector ETFs to evaluate whether some may be preferable to others. Additionally, risk factors are considered to help ascertain if there may be market inefficiencies at the sector ETF level that traders can potentially exploit.

As a reminder, the sector ETFs are a class of exchange-traded funds that invest in the stocks and securities of a specific sector in the S&P 500. For example, the XLF is called the "Financial Select SPDR ETF," and is comprised of 62 underlying symbols that operate in the financial sector and are represented in the S&P 500.

Listed below are the nine sector ETFs examined in this episode of Market Measures:

  • Financials (XLF)

  • Technology (XLK)

  • Consumer (XLY)

  • Health Care (XLV)

  • Industrials (XLI)

  • Energy (XLE)

  • Utilities (XLU)

  • Consumer Staples (XLP)

  • Basic Materials (XLB)

The question asked by the Market Measures team, was a how a simple short premium strategy had performed in each of the 9 ETFs listed above since 2005? This data, depending on your own outlook and strategy, may help traders more efficiently deploy capital going forward.

In order to produce the necessary results for analysis, tastytrade conducted a study which backtested short strangles in the nine symbols from 2005 to present.

The full parameters of the study were as follows:

  • Studied 9 SPDR sector ETFs

  • Utilized data from 2005 to present

  • Sold 1 standard deviation strangles (45 days-to-expiration)

  • Compared two trade management approaches (holding through expiration and managing winners at 50% of credit received)

As you can see in the findings below, the short straddle produced nearly identical results for each of the nine symbols. The main difference was that incorporating a trade management approach produced a higher average win rate than holding the trades through expiration.

The next phase of the study addressed an important risk dimension of this trading approach in the sector ETFs.

In particular, the team notated the average standard deviation of the P/L as well as the average P/L per day for all symbols. The results of this investigation were probably closer to what you might expect - the symbols with higher standard deviation in P/L also produced a higher P/L per day (on average).

Lastly, the team looked at the relationship between the absolute level of implied volatility versus the average P/L per day. Like the previous finding, this analysis also showed that higher risk was associated with higher potential reward - higher absolute levels of implied volatility produced a higher average P/L per day.

We can infer from this research that while win rates were similar across the board in these nine sector ETFs, there are some important nuances traders should consider when selecting a sector ETF. For example, a trader seeking high win rates, but reduced volatility in P/L, might choose to trade sector ETFs with lower absolute levels of implied volatility (but obviously still high enough to warrant a trade in the first place).

Traders targeting higher returns, and willing to accept more risk, might decide that the sector ETFs with higher absolute levels of implied volatility are more to their liking.

As we've only highlighted a small portion of the data presented on this show, we hope you'll take the time to review the complete episode of Market Measures focusing on sector ETFs when your schedule allows.

If you have any questions on this topic, or any other, drop us a line at or leave a message in the space below.

Thanks for reading!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.  

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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