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.]