This is a well known stock investment strategy which selects top performing stock funds based on the funds past returns.

This strategy upgrades the portfolios by buying the top performing funds when performance leadership changes. The original strategy is applied mainly to a class of diversified stock funds. However, such a scheme could be applied to sectors, stock ETFs or even multiple asset classes. This strategy is an application of the general momentum strategy Momentum Based on FundX Scoring to stock funds.

This strategy is also known as "fund upgrading" by FundX creators.

Simplified Rules

1. Rank the candidate funds by their Fund-X Score and by the top-5 funds with equal amount of money. Fund-X Score is an average of 12-, 6-, 3-, and 1- month total returns, plus bonus points
   • Fund-X Score= (12mo%+6mo%+3mo%+1mo%)/4+bouns points.). One bonus point is awarded to the top-15 funds in each performance period (e.g. if a fund is in the top-15 in each of the four periods, four points are added to its Score). Fund-X Score= (12mo%+6mo%+3mo%+1mo %) /4+bouns points.
2. At each month or quarter end,  rank the candidate funds by their Fund-X Score and sell the funds in your portfolio when they drop below the top 5 and buy the top 5 funds that you have not yet owned to upgrade your portfolio.

Modified Rules

• The above Rule 2 could be modified as "After 90 days, rank the candidate funds by their Fund-X Score and sell the funds in your portfolio when they drop below the top 15 and buy the top 5 funds that you have not yet owned to upgrade your portfolio". The reason to change this rule is to avoid short term fund trading redemption fee for mutual funds (if the candidate funds are ETFs, that would not be an issue) as well as to avoid whipsaw. Furthermore, the number of funds held could be extended to 10 or 15 depending on the account size. Note: at this moment, the strategy does NOT have the modified Rule 2 implemented. 

 Model Portfolios

• Unhedged portfolios: The candidate funds do not include 'CASH' thus they are fully invested all the time. As an input parameter, users could choose their favorite candidate funds or ETFs. Furthermore, they have freedom to decide the adjust frequency, minimum (maximum) number of  funds invested.
  
• Hedged portfolios: To guard against the dramatic loss during stock market downturns, we use CASH as the alternative for any of the top funds chosen if that sector's FundX score is lower than the CASH's score in the past one year period. Such a technique has been proved to be an effective way to shelter a portfolio from big loss. These portfolios are named with additional phrase 'with Cash'.

Similar funds and ideas:

• FundX Upgrade Funds are a family of mutual funds employing the basic FundX strategy. FundX has also published one of the top performing investment newsletters for more than 15 years. See FundX website for more information. 
  • FUNDX is the flagship fund which invests in a diversified no load stock mutual funds. REMIX is the corresponding fund investing in ETFs.
  • HOTFX is the aggressive version of the FUNDX, investing in sectors and emerging markets as well as in broad based funds. Its ETF cousin is UNBOX.
  • STOCX invests directly into stocks instead of the funds (it is not clear whether STOCX uses the same FundX strategy mentioned above).
  • RELAX invests in a class of lower risk stock funds (including long short funds)
  • INCMX invests in a class of bond funds as well as part of low risk stock funds.
• Sound Mind Investing is anothe family of funds which employ similar fund ungrading strategy (although its strategy is never made clear and public) as FundX. It manages two funds: Sound Mind Investing Fund (SMIFX) which is FUNDX equivalent and SMI Managed Volatility Fund (SMIVX) which employs certain hedging technique. It also publishes an  investment newsletter.
• Rydex Sector Rotation (RYSRX)
• ETF Market Opportunity (ETFOX)
• PowerShares Valueline Industry Rotation (PYH)
• Industry Leaders Fund (ILFIX): it uses a patented process to identify industry sector and individual securities weights.
• Claymore/Zacks Sector Rotation (XRO)
• Strategy Momentum Based on FundX Scoring: a FundX style scoring for momentum calculation.

Research and Newsletters

• S&P Equity Research Sector Rotation Strategy
• Mark Hulbert's recent summary on sector rotation newsletter.

Kiplingers video  for "Momentum Strategies for Investing in Funds".

See Also

• Janet Brown: About FundX: http://www.fundx.com/AboutFundX.aspx or  FUNDX, RELAX, INCMX in http://fundxfunds.com/
• CXO Advisory: The Noload FundX Mutual Fund Momentum Approach.
• Carhart, Mark, M. "On Persistence in Mutual Fund Performance", Journal of Finance, Vol. 52 No. 1, March 1997