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How to Put Sector ETFs to Use

By: ETF Trends
Posted: 10/15/2010 4:00:00 PM
Referenced Stocks: ETF

The advent of the sector exchange traded fund ( ETF ) allows individuals to easily implement sector rotation or sector allocation strategies.

In sector rotation , 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 risk.

According to Ken Hawkins for Investopedia , the idea is to overweight sectors that you believe will outperform and underweight those you believe will underperform. [ How to Build a Sector ETF Portfolio. ]

There are three considerations when selecting sector ETFs:

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:

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. ]

We also have alert tools you can use to be notified of a trading opportunity. Get more information on premium services here .

Tisha Guerrero contributed to this article.