Investing.com -- In its latest report, Sevens Report highlighted two sector rotation strategies with a track record of outperforming the S&P 500 over the long term.
Both strategies, developed by The Leuthold Group, are said to have generated annualized alpha of roughly 1.5% to 2% for decades, making them compelling options for investors looking to take a more active approach in 2024.
The first, called the Sector Bridesmaid Strategy, involves buying the second-best performing sector from the previous year. “Based on history, the previous year’s runner-up generally outperforms in the following year,” the firm noted.
They add that over the past 34 years, this approach has delivered an annualized return of 12.5%, compared to 11% for the S&P 500. It has outperformed the benchmark in 19 of those years, achieving a 56% win rate.
For 2025, the strategy points to Information Technology, which gained 36.6% last year, second only to Communication Services at 40.2%.
Leuthold also reportedly found that rebalancing this strategy monthly rather than annually increases its effectiveness: “In this speeded-up version of the strategy, the second-best sector performer over the trailing 12 months is held during the subsequent month.”
According to Sevens, this accelerated approach has generated 3.5% annualized alpha versus the S&P 500.
The second strategy called the Cheapskate Sector Strategy, involves buying the sector with the lowest price-to-earnings ratio from the previous year.
Sevens notes that the contrarian approach, while more psychologically challenging, has historically paid off, delivering an annualized return of 12.6% over 34 years. It has outperformed the S&P 500 in 20 of those years, with a 59% win rate. For 2025, Energy is the cheapest sector in the S&P 500 based on trailing P/E.
Sevens Report notes that while these strategies don’t work every year, their long-term success rates exceed those of most active managers.