The advent of the sector exchange traded fund (
) allows individuals to easily implement sector rotation or sector
, rather than seeking exposure to individual asset classes, you
allocate cash to different sectors depending on their short-term
views. Taking a sector approach has benefits, especially when
investing in sectors where stock picking is a challenge. By buying
ETFs that give you exposure to an entire segment of the market, you
can ride the fortunes of an industry while mitigating overall
According to Ken Hawkins for Investopedia
, the idea is to overweight sectors that you believe
will outperform and underweight those you believe will
How to Build a Sector ETF Portfolio.
There are three considerations when selecting sector ETFs:
- The first is that the ETF should contain the
full spectrum of sectors and stocks that make up an
- Secondly, the index should be broadly based - representative
of the overall economy.
- Lastly, there should be sufficient history on the underlying
sectors to be able to carry out the long-term due diligence
required to uncover the key factors.
Benjamin Shepherd for MoneyShow reports that
the average U.S. business cycle encompasses 60 months of expansion
and 10 months of recession. According to the National Bureau of
Economic Research, the business cycle involves five phases: three
of expansion and two recessions, in which different sectors tend to
outperform in each stage. The stages consist of this:
- In the initial expansionary stage, businesses ramp up to
fulfill new orders-a boon for technology and transportation
- During the next phase, basic materials, industrials, and
personal and business services benefit from increasing corporate
outlays and flush consumers.
- Consumer staples and energy are your best bets in the third
If you're taking a sector-focused approach, be sure to consider
the need for an entry or exit strategy, as well. As the markets
have shown us lately, you can't rely on past history to predict the
future. To find those areas that are moving, watch the 200-day
moving average. [
How to Follow Trends.
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Tisha Guerrero contributed to this article.