Different ETF Sector Rotation Strategies for Traders

Tuesday, November 24, 2009

Different ETF Sector Rotation Strategies

The great diversity of sector and broad-index ETFs allows traders to practice different sector rotation strategies. To know more about this, read ETF Sector rotation strategy and Sector ETF investing advantages and disadvantages.

Rotating market weighted sector ETFs: market weighted sector ETFs are ETFs created on the basis of market capitalization indexes. That means the ETF will be more biased towards large-cap stocks. These ETFs provide comprehensive exposure to each sector. They can offer good profits when a sector as a whole is outperforming others.
Rotating equal weighted sector ETFs: here all the stocks are given equal weight. Thus the ETF will be more biased towards small-cap stocks (as they will be more in number). They offer good profits when small-cap stocks are outperforming others but are also riskier as they don’t represent the actual economy.
Rotating fundamentally weighted sector ETFs: here the stocks are given weightage according to the company fundamentals such as cash flow, sales, book value, dividend etc. They are new additions to the sector ETFs and are good candidates for long-term investing strategies. The downside is that not much performance history is available.
Rotating only sector ETFs: this is a good and popular strategy, where the traders buy ETFs tracking sectors that show positive turnovers, sell those showing negative turnovers, and give weight to sectors according to their performances.
Rotating broad and sector ETFs: this strategy allows traders to profit both from sector and broad indexes. It also helps if the trader wants to profit from a specific sector performance but doesn’t want to lose the portfolio diversity; he can trade both types of ETFs together. For example, if he wants 40% weight to a specific sector in a portfolio, he can buy a broad index ETF having 15% weight to the sector and can have a 25% portfolio allocation to a sector specific ETF.