Rotational is a trading strategy based on two key concepts, and made possible to the retail trader only recently by the proliferation of new trading vehicles such as ETFs and ETNs. It is believed this strategy will deliver longer-term risk-to-return metrics far superior to the market’s, but in the short term, variability can be high. Turnover and trading costs are moderate.
The two concepts that Rotational utilizes are (1) component rotation and (2) asset class rotation.
In any trending price index, such as the S&P 500 or the Nasdaq 100, there will be leaders and laggards, that is, components with a large amount of positive price momentum and components with either lower, or even negative, price momentum. This momentum tends to persist, and so a focus on the individual components, with rotation into those with strong trends and out of those without strong trends, will tend to outperform the overall index. This is component rotation.
In the larger scheme of investing, there are times when different asset classes go in or out of favor. In practice, different participants define or group assets into different classes, but one could make the distinction as simple as stocks versus bonds versus precious metals, or perhaps include real estate as an additional class and separate stocks into different categories, such as domestic U.S. versus international developed markets (Europe, Japan, etc.) versus international emerging markets (South Korea, China, etc.). The key point is that when an asset class goes in or out of favor, this trend tends to persist. An example of this is the multi-year outperformance of Real Estate Investment Trusts (REITs) and Gold, starting with the bear market in overall U.S. stocks at the beginning of this century.
Rotational combines component rotation and asset class rotation to hold a small basket of ETFs or ETNs, selecting the handful with the most momentum from a representative sampling of classes and components.
