Introduction

The Sector ETF Asset Flows (SEAF™) Model is a sophisticated tool for investors who want to make informed decisions based on the flow of capital into and out of sector-specific exchange-traded funds (ETFs). This report provides an in-depth look at how the SEAF™ Model works and how it can be leveraged for tactical and strategic investing.

Understanding the SEAF™ Model

The SEAF™ Model tracks and analyzes the velocity of asset flows moving into and out of the 11 Select Sector SPDR ETFs (which together comprise the S&P 500) across three different time periods: Trading (Weekly), Tactical (Monthly), and Strategic (Quarterly). The model assigns a ranking score to each sector ETF for each time period based on these asset flows. The sector with the greatest acceleration of asset inflows gets the lowest score (1), while the sector with the greatest acceleration of asset outflows gets the highest score (11). The individual rankings for each time period are then added together to give each sector ETF a cumulative ranking score. The top three sectors (the ones with the lowest cumulative scores) are chosen for investment, equally weighted, as our backtesting has shown this methodology produces the best performance.  The SEAF™ Model is rebalanced once per week, on the weekend, and any changes in the top three ranked sectors are executed at the market open the following Monday.

The SEAF™ Model helps investors objectively determine where to invest by following the movement of investor dollars within the S&P 500, avoiding rhetoric, opinions, and forecasts. This dynamic capital movement is a key driver of relative performance in the sector space as it indicates which sectors are being favored by investors with “skin in the game” and which sectors are being avoided.

Table 1 below displays the SEAF™ Model Table for the week of May 13, 2024. The top three sectors were Financials (XLF), Utilities (XLU), and Consumer Staples (XLP).

Table 1
SEAF™ Model Chart

The SEAF™ Model Chart is another way to visualize the data.  Chart 1 below shows that the top three SEAF™ Signals for this particular week, according to their cumulative ranking scores (lime green columns), were all Favored sectors with ranking scores between 3 and 15.  On rare occasions, the top three SEAF Signals could include a sector with a Neutral ranking if there are less than three Favored sectors.  Also note that, for this particular week, there were seven Neutral rankings and just one Avoid ranking which indicated market indecision.

Chart 1
Components of the SEAF™ Model

The SEAF™ Model is comprised of::

  1. ETF Capital Flow Data: The core of the model, tracking the velocity of money moving in and out of the 11 Sector SPDR ETFs.
  2. Time Period Analysis: SEAF™ is a momentum-based model with an algorithm that monitors investor asset flows across three time periods: Weekly, Monthly, and Quarterly.
How to Use the SEAF™ Model for Investment Decisions 

Investors can utilize the SEAF™ Model in several ways:

  1. Sector Selection: By identifying sectors with strong inflows, investors can pinpoint areas of the market potentially poised for gains.
  2. Risk Management: Sectors with significant outflows may signal a time to reduce exposure or hedge positions to manage potential downside risks.
  3. Investment Timing: The model’s multidimensional analysis of investor asset flows can help in the timing of entries and exits from specific sectors, enhancing the potential for better returns.
Advantages of the SEAF™ Model

The SEAF™ Model offers several advantages:

  1. Data-Driven Decisions: By basing investment decisions on concrete data regarding capital flows, investors can reduce reliance on subjective market interpretations and opinions.
  2. Proactive Strategy Development: The model’s insights allow investors to develop proactive rather than reactive strategies, potentially improving investment outcomes.
  3. Diverse Application: Suitable for individual investors, financial advisors, and institutional portfolio managers, the model has broad applicability across different levels of market engagement. Understanding the ranking of defensive and offensive sectors can provide insight into bullish or bearish trends and, more broadly, can present a better understanding of what investors are collectively thinking. Additionally, the lack of a sustained pattern of asset flows or the quick churning of assets in the top-ranked sectors can indicate an emerging trend change in the broad market.
Beyond the SEAF™ Model: Heat Maps & Rainbow Charts

Heat Maps: Identifying The Flow Of Data

Asbury Research utilizes a heat map (Table 2 below) to identify trends and rankings within the SEAF™ model, quantifying the size and movement of various asset flows over the three time periods. The clustering of dark green cells in a particular sector indicates strong momentum, while lighter greens or yellows indicate weakening investor flows. The clustering of red cells in a particular sector signifies money aggressively leaving that sector. Opportunities often arise when sectors transition from red in the Strategic period to orange or yellow colors in the Tactical period, to shades of green in the Trading period, indicating emerging buying interest.  We can see this phenomenon occurring in Technology below.

Table 2

SEAF Model Rainbow Charts: Identifying The Trend In Asset Flows

Asset prices move in trends, and the flow of investor assets initiates and fuels those trends.  Asbury Research’s SEAF Rainbow Charts visually represent each sector’s daily overall ranking (upper panel) and relative performance (lower panel) versus the benchmark S&P 500. Named for their color-coded stripes—Green (Favored), Yellow (Neutral), and Red (Avoid)—these charts provide a one-year look back at the SEAF Model’s composite ranking score for each sector of the S&P 500, which also trends because it is driven by investor asset flows.

Chart 2

Conclusion

Asbury Research’s SEAF™ Model provides a dynamic tool for understanding and reacting to sector-specific capital flows. By integrating this model into their investment strategy, investors can enhance their ability to make informed decisions, manage risk, and capitalize on opportunities in the ETF marketplace.

For those interested in incorporating advanced data-driven analytical tools into their investment strategy, exploring the SEAF™ Model may offer valuable insights and a competitive edge in today’s dynamic market environment.

More information about the SEAF Model, including charts and tables of backtested hypothetical performance, is available by CLICKING HERE.

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