Faculty Scholarship 1994 - Present

Performance of Exchange-Traded Sector Index Funds in the October 9, 2007-March 9, 2009 Bear Market

From October 9, 2007 to March 9, 2009, the U.S. stock market experienced the worse
bear market in its history since the Great Depression. U.S. stocks lost about 56% of their value
during this period. In this paper, we compare the performances of 38 sector index funds using the
Sharpe and Treynor portfolio performance measures and find that the healthcare and consumer
staples sector index funds had the best performance and the financials and home construction
sector index funds had the worst performance in the October 9, 2007-March 9, 2009 bear market.
Empirical studies demonstrate that sector investments can provide substantial portfolio
diversification benefits. Exchange-traded index funds make it easy for investors to achieve sector
diversification. The Principal Components Analysis (PCA) is a widely used multivariate
technique in empirical studies to assess the portfolio diversification prospects of investments. In
this paper, we use the PCA technique and find that investors could maximize portfolio
diversification benefit by investing in funds with high factor loadings in different principal
components in the October 9, 2007-March 9, 2009 bear market.