The SEAF (Sector ETF Asset Flows) Model: 1st Half 2023 Performance Update
The SEAF (Sector ETF Asset Flows) Model
SEAF is an acronym for Sector ETF Asset Flows. The basic premise of the model is to invest in the sectors that the money is going to and to avoid the sectors that the money is leaving. The SEAF Model was created to quantitatively identify long/overweight opportunities in US market sectors. SEAF does this by “following the money” as it moves around the 11 Select Sector SPDR ETFs, which together comprise the S&P 500. Following the movement of money identifies these opportunities quicker and more accurately because, with the SEAF Model, we can see the money moving before the trends this money movement creates become apparent.
In the SEAF Model Graphic below, the 11 Sector SPDR ETFs are ranked weekly based on the velocity of investor assets moving into and out of them in three different time frames: Trading (one business week), Tactical (one business month), and Strategic (one business quarter). The sum of each sector’s individual scores across all three time frames determines their Ranking score, which are then categorized as Favored (score of 1-15, green), Neutral (score of 16-24, yellow), or Avoid (score of 25-33, red).
The SEAF Model Signal Overlay
The specific signals that we derive from the SEAF Model, which we use for our hypothetical performance data, are determined by a model overlay that: 1) only initiates buys/overweights in sectors that are ranked among the top two in asset inflows in at least two different time frames, 2) then maintains those long/overweight signals as long as those sectors remain ranked among the top two in at least one time frame. Additionally, 3) we have added a money management component that protects capital by exiting favored sectors during extreme adverse market moves.
Editor’s Note: Q1 2023 was the SEAF Model’s worst-performing quarter in three years. There was a reason for this: wildly swinging investor assets in the 11 Sector SPDRs as the market tried to determine whether this was 1) a Strategic buying opportunity due to low unemployment and lots of money on the sidelines, 2) a Strategic selling opportunity due to the end of Federal Reserve accommodation and broad economic expectations for a recession, or 3) flat out market fear as Congress once again “played chicken” with the debt ceiling. Meanwhile, the early March collapse of Silicon Valley Bank (SVC) just added fuel to the fire. Due to this atypical first quarter, we have added additional defensive components to our SEAF Model overlay to protect investor assets against unexpected market events.
The SEAF Model Accompanying Chart
The accompanying chart displays the latest SEAF Model scores and rankings in chart form for a comparative perspective between sectors. The lime green colored bars identify the SEAF Model Overlay’s currently favored sectors.
The next two tables below display performance data for the SEAF Model through June 2023. The starting date is July 2020 because we had to allow for the data from the Communication Services Select Sector SPDR Fund (XLC, the newest addition to the Select Sector SPDR ETFs) to normalize to the rest of the data. Each performance category is compared to the benchmark S&P 500 (SPX). The more significant comparisons are highlighted in green.
The first table below displays the quarter-by-quarter relative performance of the SEAF Model vs. the S&P 500, showing that SEAF has outperformed the S&P 500 in 9 of the past 12 quarters (75%) tested through June 2023. Not shown is that the SEAF Model has, on average during this period, outperformed the S&P 500 by 2.4% per quarter.
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The bottom part of the table shows that SEAF outperformed the S&P 500 (SPY) by 21.3% during the 2021 bull market while also outperforming SPY by 12.0% during the 2022 bear market — and overall has outperformed SPY by 28.9% throughout the entire period beginning Q3 2020 (3 years).
The next table below compares quantitative performance vs. the S&P 500, showing that the SEAF Model outperformed the S&P 500 in 9 of the 10 categories shown.
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SEAF Model performance Highlights:
- SEAF has a significantly higher total return (see chart below) and annualized total return of the S&P 500
- with a lower maximum drawdown.
- SEAF has a significantly higher alpha (excess return) and a lower beta (systematic risk) than the S&P 500.
- SEAF has both a higher up capture ratio (gains in up markets) and lower down capture ratio (losses in down markets) than the S&P 500.
The chart below plots the daily performance of the SEAF Model vs. the S&P 500, in terms of percentage return, since May 2020.
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Information about the various quantitative metrics referred to above can be found on Investopedia.com.
Disclosure/Disclaimer: The information above is provided for information purposes only and is not intended to be a solicitation to buy or sell securities. Past performance as indicated from historical back-testing may not be typical of future performance. No inferences may be made and no guarantees of profitability are being stated by Asbury Research LLC. The risk of loss trading in financial assets can be substantial, and different types of investment vehicles, including ETFs, involve varying degrees of risk. Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition. All investment models have inherent limitations in that they look back over previous data but can’t see into the future. Hypothetical past performance does not guarantee future results.