Industry Trend-following over the Long Run

Is industry trend-following an attractive strategy over the long run? In their June 2024 paper entitled “A Century of Profitable Industry Trends”, Carlo Zarattini and Gary Antonacci evaluate the long-term performance of a long-only industry trend-following (Timing Industry) strategy, modeled as follows:

• Entry – buy an industry when its daily closing price crosses above the upper band of either its 20-day Keltner Channel (with a multiplier of 2 for the high-low price range component) or its 20-day Donchian Channel.
• Sizing – each day for each open position, calculate 14-day past return volatility as an estimate of its future volatility and resize all open positions so that they contribute equally to overall portfolio volatility, limiting overall portfolio leverage to 200%.
• Exit – each day for each open position, close the position if it crosses below a stop loss represented by the lower band of either its 40-day Keltner Channel (again with a multiplier of 2 for the high-low price range component) or its 40-day Donchian Channel. However, do not ever lower the stop loss. When a position closes, reinvest proceeds into 1-month U.S. Treasury bills.

For a long-term test, they apply these rules to nearly 98 years of daily returns for 48 hypothetical annually rebalanced, capitalization-weighted industry portfolios constructed by assigning a Standard Industrial Classification (SIC) Code to each stock traded on NYSE, AMEX and NASDAQ. For a recent and more realistic test, they apply these rules to 31 sector exchange-traded funds (ETF) offered by State Street Global Advisors. Utilizing daily returns for the 48 industry portfolios since July 1926 and for the 31 sector ETFs as available (inceptions January 2005 to June 2018), all through March 2024, they find that:

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