Sector Mean Reversion in Taiwan: 14.60% CAGR and the Best Sharpe
Taiwan's sector rotation strategy returned 14.60% annually from 2000 to 2025, in TWD, while the S&P 500 returned 8.02%. What makes Taiwan stand out isn't just the top-line number. It produced the highest Sharpe ratio (0.495) of every exchange we tested, and a down capture of -9.2%. That negative sign isn't a typo. When global markets fall, this strategy tends to go up.
Contents
- Method
- What We Found
- Most Frequently Selected Sectors
- Notable Years
- Full Annual Returns
- Backtest Methodology
- Limitations
- Takeaway
- Part of a Series
- References
We tested sector mean reversion on 14 exchanges. Taiwan finished at the top on risk-adjusted terms.
Method
- Data source: Ceta Research (FMP financial data warehouse)
- Universe: TAI + TWO (Taiwan Stock Exchange + Taipei Exchange), market cap > TWD 3B (~$95M USD)
- Period: 2000-2025 (26 years, 104 quarterly rebalance periods)
- Rebalancing: Quarterly (January, April, July, October)
- Signal: Buy all stocks in the bottom 2 sectors by 12-month trailing equal-weighted return
- Benchmark: S&P 500 Total Return (SPY)
- Cash rule: Hold cash if fewer than 2 qualifying sectors exist
- Transaction costs: Size-tiered model
Historical price data with 1-day lag. Full methodology: backtests/METHODOLOGY.md
What We Found
The core finding is defensive outperformance. Taiwan's sector rotation strategy tends to be most effective precisely when global markets are falling. The -9.2% down capture means that, on average across years when SPY declined, this portfolio delivered positive returns. Combined with 87.2% up capture during rising markets, the asymmetry produces a Sharpe ratio of 0.495 that no other exchange in our study matched.
| Metric | Portfolio | S&P 500 (SPY) |
|---|---|---|
| CAGR | 14.60% | 8.02% |
| Excess CAGR vs SPY | +6.58% | — |
| Total Return | 3359% | — |
| Max Drawdown | -48.0% | -45.5% |
| Annualized Volatility | 27.49% | — |
| Sharpe Ratio | 0.495 | 0.357 |
| Up Capture | 87.2% | — |
| Down Capture | -9.2% | — |
| Win Rate vs SPY | 49.0% | — |
| Avg Stocks per Period | 80.5 | — |
| Cash Periods | 7 of 104 (7%) | — |
A $10,000 investment in January 2000 grew to roughly $345,900 by end of 2025 under this strategy.
Most Frequently Selected Sectors
Over 104 quarters, these were the sectors that appeared most often as the bottom two by trailing return:
| Sector | Quarters Selected |
|---|---|
| Financial Services | 32 |
| Energy | 30 |
| Basic Materials | 29 |
| Real Estate | 29 |
| Technology | 24 |
| Consumer Defensive | 17 |
Financial Services and Energy dominated. Taiwan's economy is export-driven and heavily cyclical, so these sectors cycle through periods of underperformance that the mean reversion signal captures well.
Notable Years
2001-2002: +46.04% and +70.25%. The dot-com collapse hit Taiwan's technology sector hard. TSMC, MediaTek, and the broader semiconductor supply chain fell sharply as global demand evaporated. The strategy rotated into beaten-down Financial Services and Basic Materials. The mean reversion from those troughs drove back-to-back years of exceptional returns, with 2002's +70.25% excess of +90.17% over SPY being the single largest annual gap in the dataset.
2008: -33.16% vs SPY -34.31%. The strategy held up marginally better during the financial crisis. Selecting underperforming sectors meant holding cyclical companies at low valuations, which provided a partial cushion. The max drawdown of -48.0% shows the strategy isn't crash-proof, but the 2008 comparison is favorable.
2009: +132.63%. This is the standout year of any exchange in the study. Taiwan's financial and technology sectors had been crushed in 2008. The 2009 mean reversion was violent. +132.63% against SPY's +24.73% (+107.90% excess) reflects how deeply the selected sectors had fallen and how quickly they snapped back.
2022: +5.03% vs SPY -18.99%. The negative down capture is most visible here. The S&P 500 fell nearly 19% in a rate-tightening year. Taiwan's sector rotation held its ground, delivering a small positive return. The selected sectors for that period were positioned in areas that had already absorbed their drawdowns from prior years.
2011: -31.15%. The worst year. Taiwan equities fell broadly as European debt fears and yen strengthening disrupted the region. Even beaten-down sectors couldn't escape the macro pressure. This is the honest side of the high-volatility profile, with 27.49% annualized volatility, years like 2011 are part of the deal.
Full Annual Returns
| Year | Portfolio | SPY | Excess |
|---|---|---|---|
| 2000 | 0.00% (cash) | -10.50% | +10.50% |
| 2001 | +46.04% | -9.17% | +55.21% |
| 2002 | +70.25% | -19.92% | +90.17% |
| 2003 | +54.10% | +24.12% | +29.98% |
| 2004 | +1.67% | +10.24% | -8.56% |
| 2005 | +5.18% | +7.17% | -2.00% |
| 2006 | +42.37% | +13.65% | +28.73% |
| 2007 | +16.50% | +4.40% | +12.09% |
| 2008 | -33.16% | -34.31% | +1.15% |
| 2009 | +132.63% | +24.73% | +107.90% |
| 2010 | +32.79% | +14.31% | +18.48% |
| 2011 | -31.15% | +2.46% | -33.61% |
| 2012 | +26.42% | +17.09% | +9.33% |
| 2013 | +17.19% | +27.77% | -10.58% |
| 2014 | +1.33% | +14.50% | -13.17% |
| 2015 | -8.53% | -0.12% | -8.41% |
| 2016 | +12.53% | +14.45% | -1.93% |
| 2017 | -2.92% | +21.64% | -24.56% |
| 2018 | -0.70% | -5.15% | +4.45% |
| 2019 | +21.17% | +32.31% | -11.14% |
| 2020 | +20.81% | +15.64% | +5.18% |
| 2021 | +25.28% | +31.26% | -5.98% |
| 2022 | +5.03% | -18.99% | +24.02% |
| 2023 | +25.98% | +26.00% | -0.02% |
| 2024 | -2.47% | +25.28% | -27.75% |
| 2025 | +1.55% | +17.88% | -16.32% |
The win rate versus SPY is 49.0%, just below half. The strategy doesn't beat the index in most individual years. It beats it over the full period because the years it wins, it wins by large margins (2001, 2002, 2009, 2022), and the years it loses, the losses are smaller on average. That asymmetry is what the negative down capture captures.
Backtest Methodology
| Parameter | Value |
|---|---|
| Strategy | Sector Mean Reversion |
| Signal | Bottom 2 sectors by 12-month trailing EW return |
| Rebalancing | Quarterly (Jan, Apr, Jul, Oct) |
| Weighting | Equal weight within selected sectors |
| Universe | TAI + TWO, market cap > TWD 3B (~$95M) |
| Period | 2000-2025 (26 years, 104 quarters) |
| Benchmark | SPY (S&P 500 Total Return) |
| Cash rule | Hold cash if fewer than 2 qualifying sectors |
| Transaction costs | Size-tiered model |
| Academic basis | Moskowitz & Grinblatt (1999) |
Limitations
Currency. All returns are in TWD. The S&P 500 benchmark is in USD. A US investor running this strategy would face TWD/USD exchange rate exposure. The TWD has been relatively stable against the dollar over the 26-year period, but currency effects can materially change realized returns in any given year.
Volatility. The 27.49% annualized volatility is high. The Sharpe ratio of 0.495 is excellent on a risk-adjusted basis, but the absolute swings are large. Years like 2011 (-31.15%) and 2009 (+132.63%) reflect a portfolio that moves hard in both directions. The max drawdown of -48.0% is comparable to SPY's worst drawdown.
80.5 stocks per period. The average holding is large for a concentrated strategy. Taiwan's stock universe is smaller than the US, so buying the bottom 2 sectors typically means buying a wide cross-section. This is a diversified sector tilt, not stock picking.
Win rate of 49.0%. The strategy loses to SPY in more years than it wins. Returns compound through the magnitude of wins versus losses, not frequency. Investors who check performance annually will experience more losing years than winning ones relative to the benchmark.
Concentration in cyclicals. Financial Services, Energy, Basic Materials, and Real Estate together account for the majority of quarters. These sectors are sensitive to global commodity cycles, interest rates, and regional economic conditions. A sustained structural shift in any of these areas would change the strategy's behavior.
Takeaway
Taiwan's sector mean reversion produced the highest Sharpe ratio in a 14-exchange study: 0.495 over 26 years. The negative down capture (-9.2%) is unusual and reflects a pattern where the strategy's contrarian sector selection tends to do well during global market stress. The 2009 recovery (+132.63%) and the 2022 resilience (+5.03% vs SPY -18.99%) are the clearest illustrations.
The tradeoff is real. High absolute volatility, a below-50% win rate versus SPY, and a max drawdown of -48.0% mean this isn't a low-risk strategy. The risk-adjusted return profile is strong, but investors need the tolerance for large swings to realize it.
Part of a Series
We tested this strategy across 14 exchanges. Other analyses in the series:
- US (NYSE + NASDAQ + AMEX) →
- India (BSE + NSE) →
- Korea (KSC) →
- Sweden (STO) →
- Global comparison →. All 14 exchanges ranked by Sharpe, CAGR, and down capture
References
Moskowitz, T. J., & Grinblatt, M. (1999). Do industries explain momentum? Journal of Finance, 54(4), 1249–1290.
Run It Yourself
Explore the data behind this analysis on Ceta Research. Query our financial data warehouse with SQL, build custom screens, and run your own backtests across 70,000+ stocks on 20 exchanges.
Data: Ceta Research (FMP financial data warehouse), 2000-2025. Universe: TAI + TWO. Market cap > TWD 3B (~$95M). Returns in TWD. Benchmark: SPY (USD). Full methodology: METHODOLOGY.md. Past performance doesn't guarantee future results.
