Mutual Funds vs ETFs: How Close Are the Results Really?
This post looks at trading the Relative Strength Strategy which trades sectors and asset classes on a monthly frequency. One of the questions I get most often from subscribers is:
“Can I trade the Relative Strength strategy using ETFs instead of mutual funds?”
The short answer is:
Yes — and the results are surprisingly close.
To test this properly, I reconstructed the actual monthly allocations from the Relative Strength strategy email broadcasts and then compared:
- The original Fidelity sector mutual fund implementation
- An ETF version using equivalent sector ETFs
I then rebuilt the daily return streams for both versions and compared them side-by-side.
The result?
The ETF version tracked the mutual fund version remarkably well.
Why This Matters
Many traders prefer ETFs because they:
- Are easier to access in some accounts
- Avoid mutual fund trading restrictions
- Allow options trading and leverage
- Can be traded internationally
Meanwhile, mutual funds still offer some advantages:
- Access to actively managed Fidelity sector funds
- No bid/ask spread
- End-of-day NAV pricing
The question has always been:
“How different is the performance if you use ETFs instead?”
Now we have a real-world answer.
The Test
I reconstructed the historical allocations from the Relative Strength strategy broadcasts beginning in mid-2025.
Each month, the strategy rebalanced into three positions based on relative strength rankings.
For the mutual fund version, I used the original Fidelity sector mutual funds from the broadcasts.
For the ETF version, I mapped the funds to liquid sector ETFs, which are also listed in the broadcasts.
Some Examples:
I also preserved direct ETF allocations that appeared in the broadcasts, including:
- GLD
- SLV
The portfolio was then reconstructed day-by-day using the actual historical price data.
The Result
The ETF implementation tracked the mutual fund strategy very closely. The correlation of daily returns between the two versions is 0.99
While the mutual fund version slightly outperformed overall, the broad behavior of the equity curve was very similar:
- Same directional trends
- Similar drawdowns
- Similar timing of gains and losses
- Similar volatility profile
In other words:
The edge of the strategy appears to come primarily from the relative strength rotation process itself — not from the specific vehicle being traded.
That’s an important conclusion.
Why the Mutual Fund Version Performed Slightly Better
There are several reasons the Fidelity mutual funds had somewhat stronger returns.
1. Fidelity Sector Funds Are Actively Managed
The Fidelity Select sector funds are not simple passive index trackers.
They can:
- Overweight stronger stocks
- Rotate internally within sectors
- Hold concentrated positions
- Deviate meaningfully from benchmark ETFs
This can create additional alpha beyond the sector trend itself.
For example:
- FSELX vs SMH was very close
- But FDCPX vs IYW diverged much more
Some of the Fidelity funds effectively acted like enhanced sector momentum portfolios.
2. ETFs Are Often Broader and More Diversified
Many sector ETFs are capitalization weighted.
That means:
- Mega-cap names dominate
- Sector rotation can move more slowly
- Momentum effects may be diluted
Meanwhile, concentrated Fidelity sector funds can move more aggressively.
3. Mutual Fund NAV Pricing Can Smooth Volatility
Mutual funds trade at end-of-day NAV.
That can slightly smooth:
- Intraday volatility
- Overseas market gaps
- Bid/ask noise
ETFs reflect intraday pricing instantly.
As a result, ETF implementations can sometimes appear slightly more volatile even when they are economically similar.
The Most Important Takeaway
The Relative Strength strategy appears robust across both structures.
That’s extremely encouraging.
It means subscribers who:
- Prefer ETFs
- Trade internationally
- Use brokerages without Fidelity mutual fund access
- Want intraday execution
…can likely still capture most of the strategy behavior using ETFs.
My Overall Conclusion
If your goal is:
- Maximum fidelity to the original strategy (pun intended!)
- Slightly stronger historical performance
- Fidelity sector fund access
…then the mutual fund implementation is still preferable.
But if you prefer:
- Liquidity
- Intraday tradability
- Broader account compatibility
- Ease of execution
…the ETF implementation appears to be a very viable alternative.
And most importantly:
The core edge of the strategy still survives.
Final Thoughts
I found this analysis extremely encouraging because it suggests the strategy’s performance is not dependent on one specific product wrapper.
The relative strength rotation process itself appears to be doing most of the heavy lifting.
That’s exactly what you want to see in a robust systematic strategy.
If you’d like to follow the Relative Strength strategy each month, you can subscribe below.
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