Exchange Traded Fund Timing and Rotation

Filed Under Finance |

by Martin Williams

One interesting development that was made possible by the vast increase in the number of exchange traded funds available is the possibility to devise a profitable ETF rotation strategy for timing the stock market. Such a strategy can theoretically allow an investor to find the sectors of the market that are increasing in price.

Broad Index ETFs

Index ETFs were introduced about 20 years ago to track the broader stock market indexes such as the famous Dow Industrials and the index tracking etf, SPY which tracks the S&P 500 Index. These exchange traded funds generally follow the major indexes and are fairly less volatile (move less in each direction) than other more specific sector and country ETFs.

Sector ETFs

Other ETFs represent more narrow market sectors. These ETFs have proliferated in recent years, allowing a sector rotation strategy to be developed that looks to very narrow market segments to determine where to invest. 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.

Of course, the more narrow the segment, the more important it is to use a strategy that finds the outperforming sectors in time to get the benefit of the sector’s performance.

Country or Region ETFs

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.

Opportunities exist to profit from ETF trading - the nimble trader can get great returns and minimize risks.

Exchange Traded Funds exist that cover almost every part of the world’s markets - aggressive traders and investors have a whole world of opportunities (literally) to profit from.

About the Author:

Information provided by 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 ETF Rotation Strategies