Better Trading Results Using ETF Rotation | Finance

By MartinWilliams
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With so many exchange traded funds available now, it has become possible to maximize investment return by creating a strategy that rotates assets between exchange traded funds - such a technique can permit a trader to find sectors that are increasing in price no matter what the current market climate is.

Broad Index ETFs

There are several types of ETFs that can be used to devise a profitable rotation strategy. The earliest type of ETF, represented by SPY and DIA as examples, track some broad market index. SPY, for example, tracks the Standard and Poors 500 Index, while DIA tracks the Dow Jones Industrial Average index. Another example of such an ETF is QQQQ which tracks the NASDAQ 100 index which is heavy in technology stocks. These broad based index ETFs allow one to devise a strategy to move into various broad based sectors when the time is right. For example, for extended periods it is sometimes true that technology stocks have outperformed the broader market. Other times, small capitalization stock have outperformed the market.

Exchange Traded Funds that Track More Specific Sectors of the Market

Such ETFs as OIL (oil), GLD (gold) and SHY (short term bonds), allow a system to be developed that seeks to find which narrow market segment is likely to outperform in the near term and to move the assets in the system into such narrow segment until a better candidate is found. These ETFs provide some of the benefits of diversification that ETFs generally enjoy, while allowing some of the volatility that investing in narrow segments can enjoy also. These ETFs are specific enough to ensure that at least some of the market segments will move up no matter what phase of the economic cycle the economy is in. Thus, sector rotation strategies that can give great returns are now possible without investing in individual stocks.

Specific sectors can, of course, move dramatically within a short period of time - making selection of the proper exchange traded fund critical to any ETF rotation strategy.

ETFs that Cover Specific Countries or Regions

The last type of ETF that is useful for creating sector rotation strategies are the country or region specific ETFs. These country specific ETFs allow the investor to devise a rotation strategy that moves into the "hot" region and then out again when another region is poised to outperform.

ETF Rotation Strategies - the Possibilities are Limitless!

ETFs are available for just about every sector of the markets - aggressive traders and investors have a whole world of opportunities (literally) to profit from.

About the Author

Martin Williams is a key principal in the creation of mechanical timing systems for the firm of Market Signal Systems LLC, providing ETF rotation strategies and mechanical timing signals for exchange traded funds (ETFs) and the federal employees TSP at Exchange Traded Fund Timing

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