Momentum is one of the most extensively documented phenomena in financial markets. Assets that have performed well over recent months often continue to outperform over intermediate horizons.
But how should investors measure momentum?
The simplest approach is to rank assets by their historical returns. For example, a sector rotation strategy might select the three sectors with the highest trailing 12-month returns.
However, many alternatives exist. Investors can measure momentum over shorter horizons, combine multiple lookback periods, examine the distance from moving averages, or use regression-based measures of trend strength. Other approaches attempt to account for volatility, price consistency, or proximity to historical highs.
These indicators capture somewhat different characteristics of price trends. A sector with a large recent gain may rank highly on cumulative returns but less favorably on risk-adjusted momentum. Another sector may have a modest cumulative return but a particularly consistent upward trend.
Does the choice of trend indicator materially affect investment performance? And do more sophisticated measures outperform simple historical returns?
To test this, I compare 12 trend indicators within the same systematic sector rotation framework, using daily US sector ETF data from June 2009 through October 2026.
Strategy and Methodology
The investment universe consists of the 11 Select Sector SPDR ETFs, including technology (XLK), financials (XLF), energy (XLE), healthcare (XLV), and the other major S&P 500 sectors.
The strategy follows, on purpose, five simple rules:
At each month-end, calculate a trend score for every eligible sector ETF.
Rank the sectors from strongest to weakest according to the selected indicator.
Invest equally in the three highest-ranked sectors.
Rebalance at the opening price on the first trading day of the following month.
Deduct a one-way transaction cost of 5 basis points.
The portfolio remains fully invested in sector ETFs. There is no market-timing rule or requirement that momentum be positive.
ETFs become eligible only after 253 consecutive valid daily closing prices, ensuring sufficient history for the indicators. Consequently, the available universe expands as newer sector ETFs are introduced.
All strategies use identical selection, weighting, rebalancing, and transaction-cost assumptions. The only difference is the indicator used to rank sectors.
Performance is compared with SPY buy-and-hold. Sharpe ratios use the three-month Treasury bill rate as the risk-free benchmark.
The analysis covers approximately 17 years, with results also evaluated separately over two equal-length subperiods.
The objective is to isolate the importance of how momentum is measured, rather than differences in portfolio construction or market exposure.