How to Build a Sector ETF Portfolio
August 31st, 2010 at 1:00pm by Tom Lydon
The vast array of exchange traded funds (ETFs) available today makes it possible to build a thorough sector-based portfolio.
Sector rotation gives you the opportunity to own ETFs that may outperform the market, while being out of areas that may underperform. Being diversified this way helps reduce some risk.
Here are some steps to building such a portfolio:
1. Identify the trend. While Sector Funds suggests looking ahead for the whole year, instead of becoming mired in day-to-day moves. The markets are so unpredictable these days, we suggest a simple trend following strategy. You can read more about how it works here.
2. Start looking for ETFs. First, identify those areas that are above their long-term trend lines (the 200-day moving average). Second, dig down deeper by looking at the expense ratio, assets under management and top holdings. You can do this with the ETF Analyzer. How is it weighted? Choose several ETFs to represent the trending sectors; don’t put all your eggs in one basket. [When to Rebalance an ETF Portfolio.]
3. Set your sell points. Before you ever buy an ETF, determine the point at which you’ll sell it. Knowing this point in advance and giving yourself time to become comfortable with the idea of selling will make it that much easier to do so. [5 Trading Rules for ETF Investors.]
4. Manage your portfolio: Watch what’s happening and make adjustments accordingly. This doesn’t mean you should watch your portfolio like a hawk, but don’t relegate it to the floor of the closet. You’ll need to make periodic adjustments, so know when to do so. You can sign up for rebalancing alerts to help you remember to do this.
If you’re ready to start building your portfolio, check out our powerful portfolio-building tools on ETF Trends. You can also add ETFs to your watchlist on your personalized Dashboard before you add them to your portfolio.
And if you’d rather not tackle your own portfolio, we have dozens of model portfolios available for you to choose from.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.