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Live Webinar June 14 2PM EST

Alpha/Beta Series: Sector Strategies

Sponsored by:

Today’s Webinar: Alpha/Beta

Mebane Faber Chief Investment Office Cambria

• How To Evaluate Sectors • How To Evaluate Sector ETFs

Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse

David Botset Senior V.P., ETFs Guggenheim

Combining Momentum Strategies

• “A Quantitative Approach to Tactical Asset Allocation” published in the Spring 2007 issue of The Journal of Wealth Management. •“Relative Strength Strategies for Investing”, April 2010.

Combining Momentum Strategies

1. Trendfollowing

2. Relative Strength

3. Combining the Two

Risk Management

"The first rule is not to lose. The second rule is not to forget the first rule.”

-Warren Buffett

I can calculate the motion of heavenly bodies…but not the madness of men

6 Source: Marc Faber, Gloom Boom Doom

Trendfollowing Hypothetical Buy & Sell Signals

Source: Global Financial Data

Trendfollowing 1928 - 2009

Source: Global Financial Data

• 10-month simple moving average.

• Rebalances monthly.

• Moves to cash (T-Bills) when out of the market.

• 10 US Sectors

Trendfollowing, 1928-2009

Relative Strength 1928 - 2009

Source: Global Financial Data

• 1,3,6,9,12 month relative strength (total return).

• Rebalances monthly.

• 3 – 6 % outperformance per year.

Relative Strength, 1928-2009

Combining Relative Strength & Trend 1928 - 2009

Source: Global Financial Data

• Rank by 1,3,6,9,12 month relative strength (total return).

• Moves to cash if below long term moving average.

• Rebalances monthly.

Where Are We Now?

Source: Global Financial Data

1.Energy

2.Healthcare

3.Real Estate

Improvements

Source: Global Financial Data

1.More asset classes.

2.Granularity within asset class.

3.Multiple time frames.

4.Other factors, Value, Economic.

Sector Beta:

Understanding Classifications & Evaluating ETFs

Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse

The Jellybean Problem

Introduction to Sector Strategies GICS vs ICB

GICS ICB

Level 1 10 Sectors 10 Industries

Level 2 24 Industry Groups 19 Supersectors

Level 3 68 Industries 41 Sectors

Level 4 154 Subindustries 114 Subsectors

Different Names, Similar Structures

Sectors vs Industries

GICS Sectors ICB Industries

Consumer Discretionary Consumer Services

Consumer Staples Consumer Goods

Energy Oil & Gas

Financials Financial

Health Care Health Care

Industrials Industrial

Information Technology Technology

Materials Basic Materials

Telecommunication Services Telecommunications

Utilities Utilities

Thomson Reuters Business Classification (TRBC)

GICS vs ICB Breakdown of S&P 500

0% 5% 10% 15% 20%

Con Discret/Services

Con Staples/Goods

Energy/Oil & Gas

Financials

Health Care

Industrials

IT/Tech

Materials

Telecom

Utilities

GICS, ICB & TRBC Breakdown of SPY

ICB SPY

GICS SPY

GICS vs ICB Breakdown of MSCI EAFE

0% 5% 10% 15% 20% 25%

Con Discret/Services

Con Staples/Goods

Energy/Oil & Gas

Financials

Health Care

Industrials

IT/Tech

Materials

Telecom

Utilities

GICS vs ICB Breakdown of MSCI EAFE

ICB EFA

GICS EFA

GICS vs. ICB Performance: Consumer Splits

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Consumer Sector ETFs TRR

IYC IYK XLP XLY

Sector Correlations

GICS vs. ICB Performance: Energy

-30

-20

-10

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Energy Sector ETFs TRR

IYE XLE

GICS vs. ICB Performance: Financials

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Financial Sector ETFs TRR

IYF XLF

Industry Breakdown: SPY through the Lens of TRBC

Name Ticker GICS ICB Industry TRBC Sector

Aetna Inc New AET Health Care Health Care FINANCIALS

Cigna Corp CI Health Care Health Care FINANCIALS

Humana Inc HUM Health Care Health Care FINANCIALS

Wellpoint Inc WLP Health Care Health Care FINANCIALS

Mastercard Inc MA IT Financials FINANCIALS

Visa Inc V IT Financials FINANCIALS

Fidelity Natl Information FIS IT Industrials FINANCIALS

Dun & Bradstreet Corp Del N DNB Industrials Consumer Services FINANCIALS

SPY TRBC vs GICS: Non-Financials

Name Ticker GICS TRBC Sector

Plum Creek Timber Co Inc PCL Financials BASIC MATERIALS

Weyerhaeuser Co WY Financials BASIC MATERIALS

Host Hotels & Resorts Inc HST Financials CYCLICAL CONSUMER

Health Care Reit Inc HCN Financials HEALTHCARE

Hcp Inc HCP Financials HEALTHCARE

Ventas Inc VTR Financials HEALTHCARE

Moodys Corp MCO Financials INDUSTRIALS

Public Storage PSA Financials INDUSTRIALS

Leucadia Natl Corp LUK Financials INDUSTRIALS

SPY TRBC vs ICB: Non-Financials

Name Ticker ICB TRBC Sector

Plum Creek Timber Co Inc PCL Financials BASIC MATERIALS

Weyerhaeuser Co WY Financials BASIC MATERIALS

Host Hotels & Resorts Inc HST Financials CYCLICAL CONSUMER

Health Care Reit Inc HCN Financials HEALTHCARE

Hcp Inc HCP Financials HEALTHCARE

Ventas Inc VTR Financials HEALTHCARE

Moodys Corp MCO Financials INDUSTRIALS

Public Storage PSA Financials INDUSTRIALS

Western Un Co WU Financials INDUSTRIALS

Financial ETFs: Performance

-50

-25

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50

75

2009 2010 2011

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IYF XLF VFH FXO RYF PFI

Financial ETFs: Performance in a Bear Market

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Oct-07 Apr-08 Oct-08

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10/10/07 - 3/9/2009

IYF XLF VFH FXO RYF PFI

The Difference? Holdings RYF PFI

ACE LIMITED 1.39% ACE Ltd. 2.53%

AMERICAN EXPRESS COMPANY

1.39% Ameriprise Financial Inc. 2.46%

AVALONBAY COMMUNITIES INC

1.43% CB Richard Ellis Group Inc. (Cl A)

2.46%

BOSTON PROPERTIES INC 1.43% CNA Financial Corp. 2.52%

CHUBB CORPORATION 1.41% Discover Financial Services 2.49%

EQUITY RESIDENTIAL 1.41% Franklin Resources Inc. 2.53%

MOODY'S CORPORATION 1.64% Moody's Corp. 2.79%

SIMON PROPERTY GROUP INC.

1.39% NYSE Euronext 2.52%

SLM CORPORATION 1.37% Prudential Financial Inc. 2.47%

VORNADO REALTY TRUST 1.38% Travelers Cos. Inc. 2.57%

Variety of Performance Stats: Financial ETFs

1 yr Perf Max

Return Min Return Sharpe Ratio Volatility

Max Drawdown

IYF 7.00 7.09 -7.20 0.61 19.12 -10.04

XLF 4.47 7.32 -7.62 0.49 20.32 -10.88

VFH 7.17 7.15 -7.52 0.62 19.49 -10.46

RYF 15.35 5.69 -7.86 1.01 18.80 -10.20

RWW 2.68 6.77 -7.58 0.35 20.58 -12.85

PFI 15.75 5.91 -5.47 1.13 16.42 -8.14

FXO 18.38 5.68 -5.82 1.33 15.98 -8.08

Biotech Performance

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-25

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100

2007 2008 2009 2010 2011

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IBB BBH PBE XBI FBT

Sector Choices: Biotech Performance

Ticker Name

Bull Market 3/9/2009 - 5/31/2011

Bear Market 10/10/2007 -

3/9/2009

BBH Biotech HOLDRS 39.33% -3.35%

IBB iShares Nasdaq Biotechnology 86.28% -32.28%

PBE PowerShares Dynamic Biotech & Genome Portfolio 111.84% -44.76%

XBI SPDR S&P Biotech 72.02% -26.59%

FBT First Trust NYSE Arca Biotechnology 169.20% -36.64%

Theme Investing: Wind

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Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

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FAN PWND

Sector Choices: Thematic Benchmarks: What Is Wind? Purity of Benchmark Rules

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Any Questions?

Mebane Faber Chief Investment Office Cambria

Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse

David Botset Senior V.P., ETFs Guggenheim

Thank You

For more information: www.IndexUniverse.com www.cambriainvestments.com

www.mebanefaber.com

www.guggenheimfunds.com