Alert

LEARN HOW TO SET UP AND MANAGE A PORTFOLIO IN 4 EASY STEPS WITH DR. JIM SCHULTZ!

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 support@tastytrade.com 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.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.