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2005issue C011-4

A two-name style-index sleeve makes rank rotation one procedure

This case study holds two style-index exchange-traded funds chosen by a relative-strength-score. Growth-versus-value and large-versus-small leadership is treated as something that changes with the market environment. In the editorial reading, a two-week review and a top-three band make leadership, replacement, and standing pat the same rank-rotation rule.

  • Growth-versus-value and large-versus-small leadership is treated as something that changes with the market environment rather than as a permanent winner.
  • The sleeve starts fully invested in the two highest-ranked style-index funds at equal dollar weight and is reviewed every two weeks.
  • A holding stays if it remains among the top three ranks; if it leaves that band it is replaced by the highest-ranked name not already held.
  • The historical workflow used index-substitution until each fund had its own price series, a year-end equal-weight-reset, next-session closing prices, and stated stand-in costs.
Entries in this reading3 entries
Current trackIndustry rotation29 readingsRank rotation76 readingsMomentum strategy103 readings

What this case is for

TradersWeek editorial reading: this is a lesson in rank-rotation as one procedure, not a claim that one style-index is permanently best. Leadership, replacement, and standing pat are meant to be tested with the same rule across growth, value, and size segments.

Growth-versus-value and large-versus-small leadership is treated as something that changes with the market environment rather than as a permanent winner.

The tradable universe

The tradable universe is a short list of exchange-traded funds that track style-index and size benchmarks. Growth and value choices sit at the large-cap and small-cap ends, and a single mid-cap tracker completes the list.

How the relative-strength-score is built

The ranking input is a relative-strength-score. It uses about 120 trading days split into quarters, averages those quarterly percentage changes, and places twice the weight on the most recent quarter.

Hold, replace, or stand pat

The sleeve starts fully invested in the two highest-ranked names at equal dollar weight and is reviewed every two weeks. Rank-rotation here holds only current leaders in that fixed universe.

A holding is left unchanged if it remains among the top three ranks. If it drops out of that band it is sold and replaced by the current highest-ranked name not already held.

Year-end equal-weight-reset

A year-end equal-weight-reset was applied so each calendar period started from balanced weights. That step requires selling part of the stronger holding.

Index-substitution and assumed costs

Because many of the funds lacked a long price history, the historical test used index-substitution. It bought the matching benchmark index until each fund's own series became available.

The historical procedure assumed next-session closing prices after a signal, a 25-dollar commission, and a 0.3 percent per-quarter charge meant to stand in for fees or slippage.

Creation-redemption and quiet names

Exchange-traded fund liquidity is described as depending on creation-redemption, the ability to create or redeem shares against the underlying basket, rather than on secondary-market volume alone. Wide spreads on quieter names are a reason to use limit orders.

Two-name style sleeve versus S&P 500 and Nasdaq Composite

A trader should see that the two-name style-index sleeve compounded far ahead of both large-cap proxies over the backtest window, not that one style is permanently best. From 1 January 1998 through 30 June 2004 the source states the sleeve gained 146.24 percent, the S&P 500 29.27 percent, and the Nasdaq Composite 30.39 percent; those three totals are taken from the Figure 3 caption, not read off the three-dimensional bars.
A trader should see that the two-name style-index sleeve compounded far ahead of both large-cap proxies over the backtest window, not that one style is permanently best. From 1 January 1998 through 30 June 2004 the source states the sleeve gained 146.24 percent, the S&P 500 29.27 percent, and the Nasdaq Composite 30.39 percent; those three totals are taken from the Figure 3 caption, not read off the three-dimensional bars.Style Index Portfolio versus S&P 500 and Nasdaq Composite · 1 Jan 1998 – 30 Jun 2004 · 1998-01-01T00:00:00.000Z to 2004-06-30T00:00:00.000Z

Hypothetical backtest, not live accounts: two names, fully invested, equal-weighted at each year-end (the author says that reset cut the compound return), fills at the next close, $25 commission, and 0.3 percent deducted each quarter. Before each ETF listed, the matching benchmark index was used. 2004 is only through 30 June.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
10 of 23 in the Industry rotation track
20061-5 pp.Next on Industry rotationConsumer staples after a smokestack cycleSmokestack stocks tend to outperform when the economy is running at full capacity, while consumer staples keep relatively constant demand for everyday goods and services.
All readings on this track · 23 readings
  1. 1985Industry leadership carryover as a bull-regime test
  2. 1988Constructing industry-group breadth and rotation measures
  3. 1992Trendline holds, trailing stops, and industry rotation
  4. 1994Inflation-deflation regimes inside the stock cycle
  5. 1996Sector rotation across economic cycle phases
  6. 2001Rebased relative performance charts for sector rotation
  7. 2001Place a small-cap growth idea inside a regime map
  8. 2004Rebuild every industry as a share of one rank scoreboard
  9. 2004Rate-hike regimes and sector rotation as a case study
  10. 2005A two-name style-index sleeve makes rank rotation one procedure
  11. 2006Consumer staples after a smokestack cycle
  12. 2007An intra-sector regime split between builders and equity REITs
  13. 2008Country and sector weights in an Africa regional-sleeve
  14. 2011Trend permission, priced entries, and sector rotation
  15. 2012Construct a regime-aware context from sector rotation
  16. 2012Regime overlays versus rank rotation
  17. 2014Rank-based sector rotation as a portfolio test
  18. 2017Real estate as a ranked industry sleeve
  19. 2017Theme sleeves: liquidity and commission filters before industry rotation
  20. 2018Retail sleeve construction through channel rotation and daily leverage
  21. 2020Water sleeve construction: satellite size, industry mix, and liquidity
  22. 2020A ranked research terminal as a three-layer watchlist procedure
  23. 2020Regression channels for sector rotation context
By fieldPortfolio construction104 readingsBy year2005104 readings
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